May 9, 2022

Enforcement: SEC Announces Crypto-Related MD&A Proceeding

On Friday, the SEC announced that it had initiated a settled enforcement proceeding against NVIDIA Corporation arising out of allegedly misleading MD&A disclosure relating to the impact of cryptocurrency mining on its business. Here’s an excerpt from the SEC’s press release:

In two of its Forms 10-Q for its fiscal year 2018, NVIDIA reported material growth in revenue within its gaming business. NVIDIA had information, however, that this increase in gaming sales was driven in significant part by cryptomining. Despite this, NVIDIA did not disclose in its Forms 10-Q, as it was required to do, these significant earnings and cash flow fluctuations related to a volatile business for investors to ascertain the likelihood that past performance was indicative of future performance.

The SEC’s order also finds that NVIDIA’s omissions of material information about the growth of its gaming business were misleading given that NVIDIA did make statements about how other parts of the company’s business were driven by demand for crypto, creating the impression that the company’s gaming business was not significantly affected by cryptomining.

In terms of the specific disclosure obligations that NVIDIA allegedly violated, the SEC’s order cites the provisions of current Item 303(c) of Reg S-K that require companies to call out unusual items impacting their financial results, and to “identify any significant elements of the registrant’s income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant’s ongoing business.” Without admitting or denying the SEC’s allegations, the company consented to an order requiring it to cease & desist from future violations of Section 17(a)(2) and (3) of the Securities Act and the books and records provisions of the Exchange Act. It also agreed to a $5.5 million civil monetary penalty.

The SEC’s press release says that the investigation was conducted by lawyers from its recently revamped Crypto Assets and Cyber Unit. Since that’s the case, the most important takeaway here may well be that isn’t just the folks peddling digital assets who need to be aware that the Division of Enforcement’s “Crypto Cops” are watching, but also more traditional companies with businesses that are being affected by the crypto craze.

John Jenkins