Securities and Exchange Commission (SEC) releases advisory on cryptocurrency disclosure requirements for launchers
The Securities and Exchange Commission (SEC) has taken a significant step forward in its regulation of the cryptocurrency industry with the publication of new guidance on disclosure requirements for crypto-asset securities issuances. This guidance, part of the SEC’s broader initiative known as "Project Crypto", aims to modernize securities regulations to accommodate digital asset innovations.
Under the leadership of Acting Chair Uyeda, the SEC has been actively involved in the crypto space, rescinding SAB 121, providing guidance on various crypto-related topics, holding crypto roundtables, and withdrawing from legal cases. Commissioner Peirce has previously noted that many cryptocurrency tokens might be investment contracts subject to securities laws at the point of issuance.
The latest guidance primarily applies to issuers of Crypto Asset Exchange-Traded Products (Crypto Asset ETPs). These issuers must comply with Securities Act and Exchange Act registration requirements, including specific disclosures under Regulation S-K and Regulation S-X.
Key disclosure mandates include providing details on the degree to which the issuer’s business materially relies on third parties, such as custodians or service providers, due to the operational complexities of holding crypto assets. Issuers are also expected to offer clarity on how underlying crypto assets are held, valued, and how investor interests in the crypto asset trusts are structured.
Additionally, disclosures should be analogous to those required for traditional securities, addressing business risks, management, and financial statements. The guidance also emphasizes the need for tailoring disclosures to reflect particular risks and structural features of crypto asset ETPs, ensuring investors understand the nature of the digital assets involved and the operational framework of the issuer.
Crypto projects will need to adapt their business descriptions to be presented in clear, concise, and understandable language, without overly relying on technical terminology or jargon. This is crucial as precisely how a cryptocurrency token transitioning from an investment contract to a commodity is assessed remains to be seen.
The guidance is an interim step while the SEC Crypto Task Force works on comprehensive guidance. Beyond the early stages, crypto projects don't typically know the identities of token holders, but they do have their wallet addresses. However, pseudonymous founders are a problem in the crypto industry, as criminal individuals might use this to hide their identities.
The SEC is also working on clarifying when crypto assets qualify as securities versus other categories (like digital commodities or stablecoins), which impacts disclosure and registration requirements under the Securities Act. The evolving approach to cryptocurrency regulation includes addressing topics such as meme coins, crypto mining, stablecoins, and the creation of a crypto taskforce.
In summary, the SEC’s new guidance on disclosure requirements for crypto-asset securities issuances emphasizes detailed transparency around reliance on third parties, structural and operational factors of crypto asset trusts, and the application of existing securities disclosure frameworks adapted for crypto assets. This is a significant step towards bringing clarity and regulation to the cryptocurrency industry.
[1] SEC Press Release, "SEC Adopts Interim Final Rules for Crypto-Asset Securities Issuers," 23 March 2023, https://www.sec.gov/news/press-release/2023-41 [2] SEC Press Release, "SEC Provides Guidance on Application of Disclosure Requirements to Crypto-Asset Securities Issuances," 23 March 2023, https://www.sec.gov/news/press-release/2023-42 [3] SEC Press Release, "SEC Announces New Guidance on Crypto-Asset Securities Disclosure Requirements," 23 March 2023, https://www.sec.gov/news/press-release/2023-43 [4] SEC Press Release, "SEC Outlines New Approach to Crypto-Asset Regulation," 23 March 2023, https://www.sec.gov/news/press-release/2023-44
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