SEC Issues Detailed Guidance for Crypto ETP Issuers

The U.S. Securities and Exchange Commission (SEC) has issued comprehensive guidance for issuers of crypto asset exchange-traded products (ETPs), outlining strict disclosure standards that could expedite compliant offerings and broaden institutional access to digital assets. The guidance, released on July 1, clarifies how these ETPs, typically structured as trusts holding spot crypto assets or derivatives, must comply with federal securities disclosure requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC’s Division of Corporation Finance emphasized the need for detailed disclosures tailored to the specific facts and circumstances of each issuer. This includes a thorough overview of the trust and the issuer’s policies regarding the management of the underlying assets. The guidance mandates that issuers provide a clear outline of the trust’s investment objective, the nature of the underlying crypto assets, related network mechanisms, policies on forks and airdrops, and fee impacts on holdings. Risk factors must be specific to the issuer and product, addressing market manipulation, price volatility, technological failures, validator incentives, and AP-related risks.

Issuers are required to disclose the offering price, underwriters, and any statutory underwriter on the cover page of their filings. The prospectus summary must clearly outline the trust’s investment objective, the nature of the underlying crypto assets, related network mechanisms, policies on forks and airdrops, and fee impacts on holdings. Additionally, issuers must detail the trust’s assets, crypto asset supply, forks, halving events, and applicable spot or futures market conditions. Net asset value (NAV) calculations must distinguish between fair value for GAAP and index-based pricing. Disclosure of the sponsor’s discretion in selecting benchmarks and their obligations to notify investors of material changes is also required.

Custody information must describe storage methods for private keys, insurance coverage, access controls, and whether assets are commingled. Fee structures must explain sponsor and third-party arrangements, particularly if paid using crypto assets. Issuers must provide names and roles of significant employees, including sponsor personnel performing policy functions. On financial statements, the SEC stated that issuers organized as statutory trusts or limited partnerships registering the offer and sale of beneficial units or limited partnership interests in multiple series should be treated as the sole registrant, not the individual series. However, issuers should also provide separate financial statements of each individual series.

The SEC's guidance also mandates the disclosure of information material to an understanding of the issuer’s business, including the extent to which the issuer’s business is reliant on third parties. This includes the services of a sponsor and several third-party service providers, such as crypto asset custodians. The statement further requires disclosure of the plan of distribution of securities offered and sold in a registered offering, as well as information relating to the identity and experience of those entrusted with the management of the issuer, including executive officers, directors, and certain significant employees.

The new guidelines released by the SEC on July 1st require detailed disclosure from issuers, encompassing net asset value calculations and custody protocols. These regulations are not legally binding but lay out very specific disclosure requirements for issuers and project sponsors. The guidance aims to streamline the process of filing crypto ETPs, addressing past delays and ensuring that investors are well-informed about the risks and characteristics of these investment products. The SEC's new guidelines mandate issuers to comply with disclosure requirements under the Securities Acts of 1933 and 1934. This ensures that investors are provided with comprehensive information about the risks associated with investing in crypto asset ETPs, including price volatility, theft of private keys, hacking incidents, fraud, manipulation, and attacks on the associated network by malicious actors. The guidelines also address the risks of concentration of ownership in the underlying crypto assets and the potential for security failures or operational problems on crypto asset trading platforms.

The SEC's statement reflects the agency’s ongoing efforts to provide clarity and guidance to market participants in the rapidly evolving crypto asset space. By outlining specific disclosure requirements and addressing common issues observed during the review of crypto asset ETP filings, the SEC aims to promote transparency and investor protection in the market for these products. The guidance is expected to help issuers navigate the regulatory landscape and ensure compliance with federal securities laws, ultimately benefiting both issuers and investors in the crypto asset ETP market.