May 18, 2021

Crypto: The SEC’s Enforcement Scorecard

If you follow the SEC’s social media accounts, you know that almost anything the agency or commissioners post on any topic receives a deluge of responses from crypto fans ranting about the SEC’s enforcement actions targeting digital assets.  Regardless of the merits of those rants, a recent Cornerstone Research report shows that the SEC has brought quite a few crypto-related enforcement actions over the years. Here are some of the highlights:

– Through December 31, 2020, the SEC has brought 75 enforcement actions and issued 19 trading suspension orders against digital asset market participants

– More than 70% of the SEC’s actions involved allegations of unregistered securities offerings, while 58% of its cases involved allegations of unregistered offerings combined with fraud. Over half (52%) of the actions involved unregistered securities offering allegations relating to ICOs.

– Other allegations include failure to register as a broker or an exchange, failure to register swap offerings to non-eligible contract participants, and failure to disclosure promoter compensation.

– 43 enforcement actions were initiated in federal court, while 32 were brought as SEC administrative proceedings. Of the 43 federal court cases, 34 involved a mix of individuals and firms as defendants. In seven cases, the defendants were individuals only, while two cases involved firms only. In 19 of the 32 administrative proceedings, the respondents were firms only. The SEC charged individuals only in six actions, or a mix of individual and firms in seven actions.

Many involved in the digital asset space have speculated that the SEC might be a more crypto-friendly environment with Gary Gensler as chair, under the assumption that his greater understanding of crypto would lead to a lighter regulatory touch.  Based on his recent statements, however, while his tenure may see a push for greater clarity when it comes to regulation of digital assets as securities, that doesn’t necessarily translate into a “light touch.”

Staff Comments: “Hey, Where’s Your Earnings Release 8-K?”

For most companies, furnishing an Item 2.02 Form 8-K is a routine part of the earnings release process.  But in a recent comment letter to CSW Industrials on its 2020 Form 10-K, the Staff noted that it had seen earnings releases on the company’s website, but that the company had not furnished any Item 2.02 8-Ks. Naturally, the Staff’s comment was “please tell us why you have not furnished these earnings releases under Item 2.02 of Form 8-K.” The company’s response was interesting. Here’s an excerpt:

For many years, the Company has issued earnings releases related to completed fiscal periods after the Company has filed with the SEC its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K relating to such fiscal periods. Further, the Company believes, based on reviews performed as part of the Company’s disclosure control procedures, that its earnings releases report substantially the same information contained in the applicable Form 10-Q or Form 10-K filings and have not disclosed any additional material non-public information related to the applicable completed fiscal period.

As a result, the company said that it “has not been required to furnish such earnings releases under Item 2.02(a) of Form 8-K.” After the Staff raised a further comment questioning whether certain disclosure in the earnings releases was contained in the company’s periodic reports, the company responded by pointing to the relevant language in those reports.  The Staff did not comment further.

Risk Factor Disclosures: Before & After

Last year, the SEC adopted amendments to Item 101, 103 & 105 of Regulation S-K. The amendments were effective in November, and this recent SEC Institute blog reports how one company responded to the changes to Item 105’s risk factor disclosure requirements in its recent Form 10-K filing. Here’s an excerpt:

In Lumen Technologies’ Form 10-K for the year-ended December 31, 2019, risk factors are on pages 20 to 48, 28 pages long. Risks described range from “Risks Affecting Our Business” to “Other Risks.” It would be fair to say that some of the risk factors, such as “We may not be able to compete successfully against current and future competitors” might be “risks that could apply generically to any registrant or any offering.”

After implementing the new disclosure requirements, and a major amount of work, in Lumen Technologies’ Form 10-K for the year ended December 31, 2020, risk factors are on pages 21 to 32. This is a reduction from 28 to 11 pages! The revised disclosures start with “Business Risks,” a simpler and more direct heading, and finish with “General Risks” as required by the new rule. Interestingly, the General Risks are less than one page. Competitive issues are addressed in a more tailored risk factor titled “We operate in an intensely competitive industry and existing and future competitive pressures could harm our performance.”

The blog quotes Associate GC David Hamm as saying that the company used the amendments to “take a fresh look” at its risk factor disclosure, which resulted in a more direct and more investor-friendly presentation.

John Jenkins