Source: Securities and Exchange Commission
As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets,[1] the Division of Corporation Finance is providing its views[2] about the application of certain disclosure requirements under the federal securities laws to offerings and registrations of securities in the crypto asset markets. These offerings and registrations may involve equity or debt securities of issuers whose operations relate to networks, applications, and/or crypto assets. These offerings and registrations also may relate to crypto assets offered as part of or subject to an investment contract (such a crypto asset, a “subject crypto asset”).[3] The Division recognizes that Acting Chairman Mark T. Uyeda formed the Crypto Task Force to help the Commission develop a comprehensive and clear regulatory framework for crypto assets, including addressing applicable registration and disclosure requirements.[4] The Division is issuing this statement to provide its views during the pendency of these deliberations.
The disclosures required in connection with offerings and registrations under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) protect investors, facilitate capital formation, and promote fair, orderly, and efficient markets. In recent years, some issuers in the crypto asset markets have registered or qualified[5] offerings of securities under the Securities Act or registered a class of securities under the Exchange Act. This statement reflects our observations regarding disclosures provided in response to existing disclosure requirements. It also addresses our views about certain specific disclosure questions that market participants have presented to the staff. While disclosures should be based on an issuer’s specific facts and circumstances, we believe that issuers may benefit from the identification of common issues we have identified during our reviews.
This statement addresses our views about certain disclosure requirements set forth in Regulation S-K as they apply to Securities Act registration forms (such as Form S-1) and Exchange Act registration forms (such as Form 10).[6] This statement also addresses our views about certain disclosure requirements of Form 20-F when used by foreign private issuers to register classes of securities under the Exchange Act, and Form 1-A for offerings exempt from registration under Regulation A.[7] This statement does not address all material disclosure items, and the disclosure topics addressed below may not be relevant for all issuers. Each issuer should consider its own facts and circumstances when preparing its disclosures. Each issuer also should consider whether it is permitted to provide “scaled disclosure” with respect to any applicable disclosure requirements.[8] Moreover, issuers should note that disclosure is not required where a particular disclosure requirement is not applicable, or they otherwise do not have responsive information.[9]
In this statement, we sometimes address the same or similar disclosure items in more than one place. This should not be read to suggest providing duplicative disclosure in multiple places throughout filings. Rather, issuers should use their judgment in determining the location for any relevant disclosures.
Description of Business
SEC rules require issuers to provide a narrative description of the material aspects of their business.[10] Issuers are required to disclose information material to an understanding of the general development of their business, and, in the case of the business done and intended to be done by the issuer, only information material to an understanding of the business taken as a whole (or with respect to each segment, if applicable).[11]
Disclosure should be tailored to the issuer’s business and presented in clear, concise, and understandable language, without overly relying on technical terminology or jargon. For example, we have observed disclosure that:
- Specifically relates to the material aspects of the issuer’s current or proposed business, rather than to crypto networks, crypto assets, or other technologies that are not specific or material to the issuer’s current or proposed business.
- Addresses the current stage of development of the business and clearly delineates any forward-looking or future plans of development.
- Is consistent with the issuer’s public statements and promotional materials (including, without limitation, white papers, and developer documentation) relating to material aspects of the business.
We also have observed the following disclosure with respect to current or proposed business plans:
- The issuer’s specific business activity, such as operating or developing a network or application, and the current stage of development of the business.
- Whether the issuer intends to continue to operate the business following the launch of a network or application, and, if so, a description of the issuer’s contemplated business activities. If not, a description of how the business will be operated following launch and whether another entity will be involved in such operations.
- To the extent the business has not been fully implemented, milestones (including technology development milestones) needed to fully implement the business.
- How the issuer generates or expects to generate revenue or increase profitability and/or value.
- Whether the security or crypto asset has any function(s) in the operation of the business, including whether it has any intended use or role in an associated network or application.
Where an issuer is developing or acquiring or intending to develop or acquire a network or application, we have observed issuers tailoring their disclosure to provide a narrative description of the purpose of the network or the application, and its operation, including the following:
- Whether the initial development team is developing a network and/or application and/or a crypto asset for the network or application.
- The current state and timeline for the development of the network and/or application to show how and when the initial development team intends to achieve network maturity or deploy the application.
- Milestones needed to fully develop the network, application, and/or crypto asset, including an estimated timeline, the estimated costs to reach key milestones, and the source of funds for the development of the network, application, and/or crypto asset.
- The objectives of the network and how the technology of the network or application functions and accomplishes its objectives, including its architecture, software, cryptographic key management, and functionality.
- Whether the technology is derived from proprietary or open-sourced software, and a description of any licenses or intellectual property rights relating to the technology.
- The process for validating transactions, the consensus mechanism, the block size, the transaction speed, the transaction (or “gas”) fees, and reward mechanism, if any.
- A description of any products and services that will be offered through the network and/or application.
- The various roles that exist or are intended to exist in connection with the network and/or application, such as users, onchain[12] and offchain[13] service providers, developers, transaction validators, and governance participants.
- The process of how network and application upgrades and updates are disclosed, proposed, developed, reviewed, and ultimately deployed.
- The measures, if any, taken to ensure network and/or application security.
- A description of the network or application’s governance system, as applicable.
Risk Factors
SEC rules require a discussion of the material factors that make an investment in the registrant or the offering speculative or risky.[14] In the context of offerings and registrations of securities in the crypto asset markets, the content and scope of an issuer’s disclosure will depend on the nature of the security and the issuer’s business, and may include factors that address the development and implementation of the issuer’s business and the particular characteristics of the security, such as its features, price volatility, limited rights of holders, valuation and liquidity risks, technological risks, cybersecurity risks, business, operational, and network risks, and legal and regulatory risks. Disclosure should address risks relating to an associated network or application if material.
The following are examples of risks that have been disclosed:
- Risks relating to the issuer’s planned business operations, such as risks relating to technology and cybersecurity, and implementation of the issuer’s business, as well as reliance on another network or application.
- Risks relating to the security, such as the risks relating to any unique characteristics of the security including its form, price volatility, the rights of holders or their lack of rights, valuation and liquidity, supply, and custody.
- Risks related to other applicable laws and regulations, such as whether the issuer’s activities may require it to register with the Financial Crimes Enforcement Network or certain state financial services agencies under money transmission laws, or to register with another regulatory authority, such as federal or state banking regulators or the Commodity Futures Trading Commission.
Description of Securities
SEC rules require an issuer to provide a materially complete description of its securities.[15] The specific disclosure depends on the particular type of security, with these rules setting forth requirements for specifically identified types of securities, such as traditional capital stock and debt securities. These rules also include a general category for securities that are not specifically identified, referring to them as “other securities” or “other kinds of securities.” In the context of offerings and registrations of securities in the crypto asset markets, we have observed disclosure where issuers have considered how this requirement applies in the context of their particular security, such as where an offering or registration involves a subject crypto asset. In these cases, issuers have provided a description of the terms, rights, and characteristics of the security in their specific context. It is important for investors to understand what the security represents.
Examples of disclosure we have observed in the context of describing a security in the crypto asset markets include, among others, the following:
Rights, Obligations, and Preferences
- How the rights of holders and characteristics of the security are memorialized, how such rights and characteristics convey when the security is transferred, and whether, when and by whom such rights and characteristics can be modified.
- The rights that holders have and do not have, such as with respect to dividends, payments, profit sharing, distributions, and voting rights, as well as the rights holders have to enforce their rights, preferences, and obligations.
- If the holders have voting rights, how the issuer intends to comply with applicable proxy rules.
- The rights that holders have and do not have with respect to transactions that impact the issuer or the network, such as liquidation, bankruptcy, sale, merger, network forks or other similar events.
- The characteristics of the security, such as term, maturity, restrictions on transferability, how the security or subject crypto asset can be accessed, held and transferred, redeemed, retired, or burned, whether the security can be loaned or pledged and by whom, and whether the security will be certificated or uncertificated, and eligible for deposit at a securities depository.
Technical Specifications
- The network or application associated with the security or subject crypto asset, and whether the underlying code can be modified, how, when, and by whom, and what effect(s) that may have on the rights of a holder of the security or subject crypto asset.
- The technical requirements for holding, accessing and transferring the security or subject crypto asset, such as the requirements and characteristics as to wallets and keys, whether the wallet addresses of the sender and receiver must be included in an approved list of participants, and any network transaction fees required for the transfer of the security or subject crypto asset and who is responsible for those fees.
- Where the definitive record of ownership exists and who maintains it.
- Whether the security or subject crypto asset is divisible, and, if so, whether there are any limits on its division.
- Whether the security or subject crypto asset and the smart contract(s) and/or code on which it is/are based, if applicable, have been subjected to a third-party security audit (i.e., an independent assessment to identify vulnerabilities and ensure compliance with industry standards), and if, so who conducted the audit and the results of the audit.
Supply
- The rules governing the total supply of the security or subject crypto asset, including the total supply, whether it is fixed at a maximum possible supply, the method for minting or generating the security or subject crypto asset, whether the supply will be created at initial generation or continuously or from time to time, whether there is a process for redeeming, retiring, freezing or burning the security or subject crypto asset, whether any of the supply is reserved for the network’s treasury, particular uses or participants, and whether any portion of the supply is subject to vesting and/or lock-ups.
- Whether any entity or person (or group of persons) is responsible for implementing rules governing the total supply and/or has the authority or ability to change the rules.
- Whether the issuer intends to enter into any arrangements with market makers or similar firms to distribute and/or provide liquidity for the security or a subject crypto asset and the terms of such arrangement.
If the issuer’s business involves crypto assets that themselves are not securities, whether offered as part of or subject to an investment contract or otherwise, similar disclosures, if material, may be relevant to the section of the registration or offering statement discussing the issuer’s business.[16]
Directors, Executive Officers, and Significant Employees
SEC rules require disclosure of information relating to the identity and experience of those entrusted with the management of the issuer, including executive officers, directors, and certain significant employees who are (or are expected) to make a significant contribution to the issuer’s business.[17] SEC rules also require such disclosure for persons who do not hold formal titles or positions as executive officers or directors but who perform policy-making functions typically performed by executive officers or perform similar functions as directors.[18] Further, if a third party is performing the policy-making functions typically performed by executive officers and directors, we have observed disclosure addressing the third party that satisfies the applicable disclosure requirements. For example, certain trusts – such as the spot crypto exchange-traded products – have a sponsor with directors and executive officers who perform functions similar to directors or executive officers of the trust. In these cases, disclosure has been provided with respect to the directors or executive officers of the sponsor. Although disclosure regarding executive compensation of the issuer would not be applicable in this situation,[19] disclosure may be required of any fees paid to the third party for performing such functions.[20]
Financial Statements
SEC rules require issuers to provide financial statements that comply with applicable requirements.[21] Issuers with requests for assistance regarding the form and content of financial statements and other financial information required to be included in Commission filings should contact the Division’s Office of Chief Accountant.[22] Issuers may also consult with the SEC’s Office of the Chief Accountant on accounting and financial reporting questions, especially those involving unusual, complex, or innovative transactions.[23]
Exhibits
SEC rules require an issuer to file as an exhibit any instrument defining the rights of security holders.[24] In connection with offerings and registrations of securities in the crypto asset markets, to the extent that the rights, preferences, and obligations of holders of the securities are memorialized in smart contract(s) or otherwise programmed into the code of a network or application, we have observed filings include as an exhibit the code of the smart contract(s) and/or the network or application, with the issuer updating any such exhibit in response to subsequent changes in such code.[25]
Contacting the Division
The Division welcomes questions about the application of the SEC’s disclosure rules to offerings and registrations, as well as any ongoing reporting obligations. We also welcome requests for other assistance (including requests for interpretive or no-action letters) relating to these issues and questions. Information about how to contact the Division is available on our website.[26]
[1] For purposes of this statement, a “crypto asset” is an asset that is generated, issued, and/or transferred using a blockchain or similar distributed ledger technology network (“crypto network”), including, but not limited to, assets known as “tokens,” “digital assets,” “virtual currencies,” and “coins,” and that relies on cryptographic protocols. References in this statement to “network” refer to a crypto network, and references to “application” refer to an application running on such a crypto network.
[2] This statement represents the views of the staff of the Division of Corporation Finance (the “Division”). It is not a rule, regulation, guidance, or statement of the U.S. Securities and Exchange Commission (“Commission” or “SEC”), and the Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
[3] Nothing in this statement is intended to suggest that registration or qualification is required in connection with an offering of a crypto asset if the crypto asset is not a security and not part of or subject to an investment contract.
[5] Offerings of securities in the crypto asset markets can be, and have been, qualified under Regulation A.
[6] See 17 C.F.R. §229.10 et seq. Form F-1 is a Securities Act registration form that can be used by foreign private issuers. Certain of the disclosure topics discussed in this statement may apply differently to foreign private issuers using Form F-1
[7] See 17 C.F.R. §239.90. Form 20-F is an Exchange Act form that can be used by foreign private issuers. Certain of the disclosure topics discussed in this statement may apply differently to foreign private issuers using Form 20-F and issuers conducting exempt offerings using Form 1-A.
[8] Scaled disclosure refers to disclosure accommodations that the federal securities laws sometimes provide for smaller or newly public companies, such as smaller reporting companies, non-accelerated filers, or emerging growth companies. These accommodations apply to a qualifying company’s registered offerings and its ongoing public company reporting. Scaled disclosure permits these companies to provide less extensive disclosure than other companies.
[9] See, e.g., Rule 404(c) under the Securities Act, and General Instruction II.B. of Form S-1, and General Instruction C of Form 20-F. For example, disclosure regarding dilution to stockholders, market price and dividends, and certain other stockholder matters only is required if the securities being offered are equity securities. See Items 201 and 506 of Regulation S-K, Items 8.A., 9.E., and 10 of Form 20-F, and Items 4 and 7 of Part II of Form 1-A. In addition, disclosure regarding properties only is required where issuers have material physical properties. See Item 102 of Regulation S-K, Item 4.D. of Form 20-F, and Item 8 of Part II of Form 1-A.
[10] See Item 101 of Regulation S-K, Item 4 of Form 20-F, and Item 7 of Part II of Form 1-A.
[11] The SEC, upon written request of the registrant and where consistent with the protection of investors, may permit the omission of any required information relating to the issuer’s business or the furnishing in substitution thereof of appropriate information of comparable character. See Instruction 3 to Item 101 of Regulation S-K.
[12] An “onchain” transaction occurs directly on a network and is validated in accordance with the protocol of the network, with the transaction recorded on the network’s public ledger.
[13] An “offchain” transaction occurs outside the network where the parties agree that a third party will validate and authenticate the transaction.
[14] See Item 105 of Regulation S-K, Item 3.D of Form 20-F, and Item 3 of Part II of Form 1-A.
[15] See Item 202 of Regulation S-K, Item 12 of Form 20-F, and Item 14 of Part II of Form 1-A.
[16] See footnote 10 above and accompanying text.
[17] See Item 401 of Regulation S-K, Items 1 and 6 of Form 20-F, and Item 10 of Part II of Form 1-A.
[18] See Rule 405 under the Securities Act and Rule 3b-7 under the Exchange Act. As noted above, disclosure is not required where a particular disclosure requirement is not applicable, or the issuer otherwise does not have responsive information. For example, certain trusts do not have a board of directors or persons performing similar functions and, therefore, do not provide disclosure regarding members of a board of directors.
[19] See Item 402 of Regulation S-K, Item 6 of Form 20-F, and Item 11 of Part II of Form 1-A.
[20] See Item 404 of Regulation S-K, Item 7 of Form 20-F, and Item 13 of Part II of Form 1-A.
[21] See Item 11 of Form S-1, Items 8, 17, and 18 of Form 20-F, and Part F/S of Form 1-A.
[22] See footnote 26 below and accompanying text.
[24] See Item 601 of Regulation S-K, Item 19 of Form 20-F, and Part III of Form 1-A.
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