SAB No. 121 provides guidance to companies who hold crypto-assets for others regarding their related reporting and disclosure requirements.
Essentially, companies currently reporting under the Exchange Act or Securities Act (as defined below) will need to follow the new articulated reporting requirements, including SPACs.
Both liabilities and assets will need to be reported, along with risk exposure, and the reporting required is not limited to the company financial statements.

On March 31, 2022, the Division of Corporation Finance and the Office of the Chief Accountant (staff) of the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 121 (SAB 121), which “adds interpretive guidance for entities to consider when they have obligations to safeguard crypto-assets held for their platform users.”

The guidance applies to entities which “file reports pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) and entities that have submitted or filed a registration statement under the Securities Act of 1933 (“Securities Act”) or the Exchange Act that is not yet effective. The SAB is also applicable to entities submitting or filing an offering statement or post-qualification amendment thereto under Regulation A, entities subject to the periodic and the current reporting requirements of Regulation A, and private operating companies whose financial statements are included in filings with the SEC in connection with a business combination involving a shell company, including a special purpose acquisition company.” Thus, the net of those required to report is wide but not surprising.

The guidance focuses specifically on the extra technological, legal and regulatory risks associated with safeguarding digital assets, when compared with more traditional asset classes. Indeed, SAB 121 asserts that a company is subject to “significant increased risks… including an increased risk of financial loss” when such company controls cryptographic keys attached to a user’s digital assets. When exerting such control, reporting companies should disclose and quantify these obligations, recording a liability and corresponding asset on their balance sheets at fair value in doing so.

Relevant dates are also enumerated in SAB 121. Existing registrants must apply SAB 121 to financial statements for both interim and annual periods, as applicable, ending after June 15, 2022, with retrospective application, at a minimum, to the beginning of the fiscal year. Other entities subject to SAB 121 apply the requirements in their next submission or filing. Retrospective application is required to either the beginning of the most recent annual period ending before June 15, 2022, when a subsequent interim period is presented, or the beginning of the two most recent annual periods ending before June 15, 2022, when a subsequent interim period is not presented.

The following specific disclosures of the safeguarding obligation are required:

  • How the issuer is accounting for the safeguarding liability and asset and the impact of initially applying the SAB;
  • The nature and amount of each significant digital asset that the issuer is responsible for safeguarding on behalf of others, along with vulnerabilities that the issuer has from any related concentration;
  • Because loss exposure is based on the risks associated with safeguarding crypto-assets held for platform users, companies should measure potential safeguarding liability at initial recognition and on each reporting date at the fair value of the crypto-assets for which the company has holding responsibility;
  • The company should also recognize the related asset at the same time it recognizes the liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for platform users;
  • Who, the company, its agent or another third party, holds the cryptographic keys, maintains the internal recordkeeping of those assets, is obligated to secure the assets and must protect them from theft or other potential loss;
  • The notes to the financial statements should include concrete and clear disclosure of the nature and amount of crypto-assets that a company is responsible for holding for its platform users, with separate disclosure for each significant crypto-asset, along with vulnerabilities and uncertainties the company has due to any related concentration;
  • Such disclosure should include information regarding the fair value measurements of the safeguarding obligations; and
  • Accounting for the liabilities and corresponding assets should be described in the financial statement footnotes.

In addition, SAB 121 clarifies for reporting companies that disclosures covering the material risks and uncertainties associated with holding digital assets may be required outside of the financial statements, including in the description of business, risk factors or management’s discussion and analysis of financial condition and results of operation.

SEC Commissioner Hester M. Peirce issued a simultaneous statement in opposition of SAB 121. In this statement, Commissioner Peirce asserted that SAB 121 only adds to the SEC’s “scattershot and inefficient approach to crypto.” She further took issue with the lack of the staff’s acknowledgement of its responsibility for creating the legal and regulatory risks that it is seeking to address in the release. While she did not necessarily disagree with the substance of the guidance, she did note its apparent randomness given the longstanding nature of underlying circumstances. Additionally, Commissioner Peirce questioned why the staff used a staff accounting bulletin and not a form of rulemaking process that allowed for possible public participation.

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