The latest statement in a series of SEC Crypto-related declarations envisage this non-binding statement to clarify how the issuer of Crypto Asset securities “enter and register” offers under federal securities laws.
It carved certain meme coins (February 27), proof of work mining arrangements (March 20), and fully USD-backed Stablecoins (April 4), and faces recent SEC staff positions as they do not involve securities trading.
The April 10 statement justifies crypto assets, which are securities, and emphasizes that the provision and registration of such crypto assets must comply with existing disclosure requirements.
In particular, staff have explicitly identified that nothing of this guidance suggests that it is necessary to register crypto assets that are not securities. In other words, if the cryptocurrency does not meet the definition of security based on the “family similarity” test, the Howey test, or related case law and other committee statements, the SEC registration system does not apply by default. The staff’s message is clear about the crypto assets that make up the securities. There is no “free pass”. This stance reflects a shift in tone and approach from how the SEC dealt with questions about how the securities registration process was applied to crypto assets, indicating its willingness to engage in crypto assets projects seeking a path to market compliance.
Staff observations and opinions regarding crypto assets disclosure
The staff statement does not create new rules, but highlights how Regulation SK (sets required disclosures in securities law registration forms, such as Form S-1), Form 20-F (used by foreign private issuers), and Form 1-A (used for small-scale provisions under Regulation a) apply to the provision of security securities for crypto assets. Staff outlined observations and views on disclosures provided in response to these existing disclosure requirements.
Business description. Publishers should provide business tailored disclosures that are implemented and intended to be done in a clear and understandable language without undue reliance on technical terms. Such disclosures include objectives, underlying technology (including related intellectual property rights), operational mechanisms (consensus mechanisms, transaction fees (also known as “gas”), verification processes), governance systems, and network or application security measures. Publishers should also avoid describing networks, assets, or technologies that are not specific or material to the publisher’s current or proposed business, clearly distinguish between existing features and future plans, and ensure consistency with other public statements and promotional materials, such as technical white papers and developer documents. Risk factors. Issuers must provide robust and specific risk disclosures related to security and the issuer’s business. This may include risks related to technology and cybersecurity (e.g., smart contract bugs, network attacks, reliance on another network or application), security (e.g., volatility, liquidity, supply, custody, rights of that right, or lack thereof), and the applicability of legal/regulatory risks, law or commander applicability. Description of the securities. Issuers should consider how disclosure requirements apply in the context of cryptocurrency market security. The SEC provided the following example: Rights, obligations, and preferences: Disclosure may address rights in relation to transactions that affect the issuer or the network (such as a network fork or other similar events). How the publisher complies with the applicable proxy rules. Transferability limitations. How to access, redeem, retire or burn crypto assets. And how is such rights commemorated? Technical Specifications: Disclosures may provide information about the network or application used. Procedure for modifying the underlying code. Asset schizoidity; technical requirements for wallets and keys. Network transaction fees and responsible for such fees. and whether such technology is subject to third-party audits. Supply: Staff also highlighted disclosures related to the total supply and issuance mechanics of crypto assets. arrangements to support crypto assets building or burning, best schedules, lock-ups and contracts with market makers and trading platforms. Directors, executive officers and key employees. Even if Crypto Venture does not have a traditional executive or director (“D&OS”), equivalent disclosures must be provided to anyone performing the major policy making functions normally performed by D&OS. Furthermore, if a third party is performing a function that is normally performed by D&OS, the disclosure of that third party may meet the applicable disclosure requirements. The example cited by the staff is an example of a crypto trust with D&OS performance features similar to Crypto Trust’s D&OS. In such cases, staff showed that sponsor’s D&OS disclosures could meet the requirements. Additionally, disclosure may be required at fees paid to third parties to perform such functions, such as disclosure of executive compensation provided by traditional issuers. Financial statements. As with any other provision, you must provide appropriate financial statements (including audited financial statements as needed). Staff encourage early consultations with the SEC’s Chief Accountant’s office on new accounting issues (for example, how to value revenue from sales or revenue from sales). Code display. If the rights and obligations of the holder of a security are embodied in a smart contract or are included in the code, the code may be submitted as a means of defining the holder’s rights as an exhibition. If the code that manages crypto assets changes over time, the publisher must prepare to update such exhibits.
The staff’s statement emphasized that the above is an illustrative example. By reviewing these areas, staff signals the level of detail and crypto-specific context expected from providing prospectus and circulation for digital asset securities. In reality, Crypto Asset publishers preparing SEC filing should think of them like public companies. Not only should they explain technology and talknomics, but they also their business, risks and financial position in ways that investors can access.
Impact on market participants
Staff guidance on cryptocurrency securities offering disclosure is another step in resetting the regulatory approach the SEC is working to address the application of securities laws to cryptocurrency assets. This statement applies existing disclosure requirements that apply to all public offerings of securities to crypto assets. While staff statements should not be considered groundbreaking, they serve as an important confirmation of staff perspectives regarding the practical application of existing disclosure requirements as the SEC is working on a more comprehensive regulatory framework for crypto assets.
Importantly, staff statements do not clarify what crypto assets are securities or advance the discussion of new frameworks of how to define this question.
Looking ahead
The staff statement is another step in the committee’s commitment to a more comprehensive cryptocurrency regulatory framework. Commissioner Hester Perth praised the company as a “small step” to help investors secure important information about crypto assets projects. Creating a new regulatory framework for crypto assets is firmly within the jurisdiction of the SEC, and the Committee emphasizes that it is intentionally moving towards this reality.
In particular, Congress is also actively discussing digital assets laws that can provide a new regulatory framework for crypto assets.
