On March 31, 2022, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 121 (“SAB 121”) to provide guidance for companies in their handling of crypto-assets and to provide investors with the knowledge to make informed decisions. Specifically, SAB 121 focuses on the reporting and disclosure requirements for companies who hold crypto-assets, as well as the extra technological, legal, and regulatory risk associated with crypto-assets when compared to traditional asset classes. In addition, SAB 121 provides specific disclosure requirements and relevant dates for companies to meet the requirements of their safeguarding obligation and for registration and application purposes.

Overall, SAB 121 explains that companies currently reporting under the Exchange Act or Securities Act will be subject to the new reporting requirements, which includes SPACs, as defined in the staff accounting bulletin. The reporting required includes more than the company’s financial statements–– it includes liabilities, assets, and risk exposure. In effect, this would help reduce the ambiguity surrounding crypto-assets and digital assets in general while providing increased transparency to the parties engaging in such a transaction. Here, SAB 121 states that a company is subject to “significant increased risks . . . including an increased risk of financial loss” when such company controls the cryptographic keys affiliated with a user’s digital asset.

 However, “Crypto Mom” Commissioner Hester M. Peirce issued a statement in opposition of SAB 121, stating that it is “yet another manifestation of the [SEC’s] scattershot and ineffective approach for crypto.” She continued that in creating the statement, the staff failed to take responsibility for creating the risks it was seeking to confront. In addition, she took issue with the seemingly random timing and format of the guidance; it did not follow the conventional administrative rulemaking process typically used in the law.

If one reason for the release of SAB 121 was to provide increased transparency and knowledge regarding crypto-assets, then it seems counterintuitive to avoid the administrative rulemaking process, which specifically accounts for public participation in the decision-making process.

Ultimately, companies ought to review SAB 121 upon any handling of crypto-assets and their preparation of financial statements. Clearly, there are a host of risks surrounding digital assets, as SAB 121 itself enumerates. Although digital assets seemingly promise impressive returns, it is vital such risks are mitigated. Best practices to mitigate such risks include compliance with SAB 121 and doing your due diligence on digital assets. Though the guidance itself is ambiguous on its face, it reflects an increased movement in clearing regulatory ambiguity and in the crypto market. In the spirit of the bitcoin community, we are still amidst “FUD”––“fear, uncertainty and doubt.”

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Works Cited:

See SEC Staff Accounting Bulletin No. 121 (March 31, 2022), available here. In SAB 121, the Staff reminded readers that “[t]he statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent staff interpretations and practices followed by the staff in the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.”

See Commissioner Hester M. Peirce, Response to Staff Accounting Bulletin No. 121 (March 31, 2022), available here.

See Gary M. Brown, Richard B. Levin, Kevin Tran, Brian Russ, Megan Kilissanly, SEC Releases Staff Accounting Bulletin on Accounting, Reporting, and Disclosure Obligations for Crypto-Assets (Apr. 22, 2022), https://www.nelsonmullins.com/idea_exchange/alerts/additional_nelson_mullins_alerts/all/sec-releases-staff-accounting-bulletin-on-accounting-reporting-and-disclosure-obligations-for-crypto-assets).