SEC releases new guidance on how federal securities laws apply to crypto assets

The U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance has provided nonbinding guidelines regarding the potential application of federal securities laws to cryptocurrency and how industry players should make disclosures.

These disclosures come ahead of its second roundtable — which will focus on trading — “as part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets.”

SEC urges crypto firms to provide clearer operational and token disclosures

In its latest guidance on the potential application of federal securities laws to crypto assets, the SEC staff emphasized that companies issuing or dealing with tokens that may be considered securities should provide detailed information about their operations.

The division clarified that the statement reflects its views on specific disclosure issues raised by market participants and its observations of disclosures made under existing regulations.

Generally, crypto firms making such disclosures have shared a broad range of information, including the nature of their business, the functionality of any issued tokens, and how the company currently generates or plans to generate revenue.

Apart from this, they should also reveal whether they intend to stay involved in a cryptocurrency network or app after the guidelines are launched and, if not, whether any other entities would take over.

Moreover, cryptocurrency companies are required to describe their technology, including whether or not their product is a proof-of-work or proof-of-stake blockchain, its block size, transaction speed, reward mechanisms, network security measures, and whether the protocol is open-source.

The SEC staff also pointed out that registration or qualification is not necessary when it comes to cryptocurrency offerings that are not securities and are not included in an investment contract. The statement did not, however, specify which digital assets might qualify as securities.

Joe Carlasare, a commercial litigator, commented regarding the guidelines, mentioning that the statement is a refreshing and welcoming step toward clearer regulatory guidance.

Based on his argument, following the guidelines would assist entities to position themselves more favorably with regulators and demonstrate a commitment to transparency and credibility.

The division broadens its guidance to build on the SEC’s Crypto Task Force

The SEC staff statement stated that in addition to standard business, operational, legal, and regulatory risks, issuers should typically make clear the risks associated with price volatility, network and cybersecurity vulnerabilities, and custody risks.

Additionally, according to the SEC’s statement, an issuer is required to provide a complete description of security, including the mechanism for distributing dividends, profit-sharing, and voting rights and how those rights are enforced.

The agency further stated that a firm should disclose whether the protocol code is changeable, if so, who has the authority to change it, and whether the smart contracts involved have been subjected to a third-party security audit.

Furthermore, the statement mentioned identifying executives and “significant employees,” as well as whether the token’s supply is fixed and how it is or will be issued.

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