Staff from the US Securities and Exchange Commission have provided insights regarding the applicability of federal securities laws to cryptocurrencies, emphasizing that businesses issuing or trading tokens that could qualify as securities need to enhance the transparency of their operations.
The SEC’s Division of Corporation Finance issued a statement on April 10 to clarify how federal securities laws pertain to crypto assets.
This statement was based on observations of disclosures under existing regulations and aimed to address particular disclosure inquiries raised by market participants.
The guidance, which the Division clarified holds “no legal authority or impact,” indicated that crypto firms typically offer a range of information regarding their operations, such as the specific functions of the company, how issued tokens operate, and their strategies for generating — or plans to generate — revenue.
Furthermore, firms disclosed whether they intend to stay active in a crypto network or application post-launch, and if not, whether other entities would assume control.
Companies should also provide insights into their technology, detailing whether their product utilizes proof-of-work or proof-of-stake blockchain, including specifics about block size, transaction speed, reward systems, security measures, and whether the protocol is open-source.
The SEC staff clarifies that registration or qualification is unnecessary for crypto offerings that do not constitute securities or fall under an investment contract. However, the statement did not clarify which digital assets may be classified as securities.
“Following these guidelines will assist entities in not only positioning themselves more favorably with regulatory bodies but also showcasing their dedication to transparency and trustworthiness,” he stated.
Crypto firms should disclose all risks
The SEC staff statement indicated that issuers typically provide clear disclosures regarding risks tied to price fluctuations, cybersecurity vulnerabilities, network risks, in addition to standard business, operational, legal, and regulatory concerns.
A “materially complete description” of a security is generally required from issuers, covering mechanisms for dividends, distributions, profit-sharing, and voting rights, including the enforcement of those rights.
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It was noted that firms should clarify whether the protocol’s code can be modified, and if so, who has the authority to make such changes, as well as whether the smart contracts have undergone third-party security audits.
Additional disclosures highlighted in the statement include whether the token supply is fixed, how it was or will be issued, and identification of key executives and essential employees.
The Division mentioned that this guidance builds upon the SEC’s Crypto Task Force, which plans to facilitate discussions through a series of roundtables with the crypto industry about the regulation of crypto trading, custody, tokenization, and decentralized finance.
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