SEC Releases Comprehensive Guidelines for Issuers of Crypto Exchange-Traded Products

The U.S. Securities and Exchange Commission (SEC) recently released detailed guidance for issuers of crypto asset exchange-traded products (ETPs), setting forth stringent disclosure standards that may enhance compliant offerings and expand institutional access to digital assets. This guidance, unveiled on July 1, specifies how these ETP structures, commonly established as trusts holding either spot crypto assets or derivatives, must adhere to federal securities disclosure requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Division of Corporation Finance at the SEC underscored the importance of issuing comprehensive disclosures tailored to the particular circumstances of each issuer. This involves providing an extensive overview of the trust and the issuer’s practices related to the management of the underlying assets. The guidance stipulates that issuers must offer a clearly delineated description of the trust’s investment objective, the characteristics of the underlying crypto assets, relevant network mechanisms, policies regarding forks and airdrops, as well as the impact of fees on holdings. Risk factors should be specific to the issuer and the product, encompassing concerns such as market manipulation, price fluctuations, technical malfunctions, validator incentives, and risks associated with authorized participants.

In the realm of disclosures, issuers are mandated to reveal essential details like the offering price, underwriters, and any statutory underwriter at the outset of their filings. The prospectus summary should distinctly delineate the trust’s investment objective, the nature of the underlying crypto assets, related network mechanisms, policies concerning forks and airdrops, and the effects of fees on holdings. Additionally, issuers must provide explicit information about the trust’s assets, the supply of crypto assets, forks, halving events, and the prevailing conditions in the spot or futures markets. Proper distinction must be made in net asset value (NAV) calculations between fair value for GAAP standards and index-based pricing. Disclosure about the sponsor’s authority in selecting benchmarks and their obligation to inform investors of material alterations is also obligatory.

Regarding custody, issuers are required to outline the methods used to store private keys, insurance coverage, access controls, and whether assets are mixed. Fee structures should elucidate the sponsor’s and third-party arrangements, especially if paid using crypto assets. The names and roles of key employees, including sponsor personnel responsible for policy functions, should be disclosed. In terms of financial statements, the SEC has clarified that issuers organized as statutory trusts or limited partnerships involved in offering and selling beneficial units or limited partnership interests in multiple series should be treated as a solitary registrant, rather than individual series. Nonetheless, issuers need to provide separate financial statements for each distinct series.

The SEC’s guidance, rolled out on July 1st, entails meticulous disclosure requirements for issuers, including net asset value calculations and custody protocols. While not legally binding, these regulations establish precise disclosure expectations for issuers and project sponsors. The intent behind this guidance is to streamline the filing process for crypto ETPs, addressing prior delays and ensuring that investors possess a comprehensive understanding of the risks and characteristics inherent in these investment vehicles. By obligating issuers to comply with disclosure standards outlined in the Securities Acts of 1933 and 1934, the SEC is enabling investors to access detailed information concerning the risks associated with investing in crypto asset ETPs, spanning from price fluctuations to cyber threats and market manipulation. The guidelines also underscore the hazards posed by the concentration of ownership in the underlying crypto assets and the potential for security breaches or operational disruptions on crypto asset trading platforms.

The SEC’s recent statement mirrors its ongoing commitment to providing clarity and direction to market participants amidst the swiftly changing landscape of crypto assets. By delineating specific disclosure requirements and addressing common challenges observed in the review of crypto asset ETP filings, the SEC is striving to foster transparency and safeguard investor interests in the market for these products. It is anticipated that this guidance will assist issuers in navigating the regulatory framework and ensuring compliance with federal securities laws, thereby benefitting both issuers and investors in the realm of crypto asset ETPs.