SEC Enforcement Broadens Its Crypto Focus | Goodwin


On May 6, 2022, the U.S. Securities and Exchange Commission announced that it had resolved charges against NVIDIA Corporation alleging that the company’s disclosures about the impacts of increased use of its gaming products by cryptocurrency miners were inappropriate. and misleading. Without admitting or denying the SEC’s findings, NVIDIA accepted a cessation and withdrawal order (the “Order”) and agreed to pay a $ 5.5 million fine. The Order and the related press release provide valuable information about how a issuer’s disclosure obligations may be affected by its links to the cryptocurrency, whether such links are intentional or direct. The Order also serves as an example of the SEC’s continued focus on cryptocurrency issues, just days after the SEC announced that 20 new positions will be added to its Cryptological and Cyber ​​Assets Unit, nearly doubling its size.

The Order states that as the prices of certain cryptographic assets increased in 2017, NVIDIA’s graphics processing units (“GPUs”), which are designed and marketed for gaming, increasingly used mining ether and other cryptographic assets. . At the time, analysts and investors were interested in understanding whether the company’s gaming revenue was affected by cryptocurrency mining. Seeking to assess the sustainability of revenue growth in light of the volatility of certain cryptocurrency asset prices, analysts and investors have regularly asked senior management about the extent to which gaming revenue growth has been driven by cryptocurrency.

According to the Order, NVIDIA’s internal documents reflect that it was aware that its gaming sales were being positively affected by the rise in cryptocurrency. Some of NVIDIA’s sales staff had expressed a belief that much of the company’s growing demand for gaming products was being driven by cryptographic mining. Although the company lacked visibility into whether any gaming GPUs were purchased in particular for cryptographic mining, NVIDIA created internal estimates indicating that cryptographic mining was a major factor in the company’s year-on-year growth in the gaming segment throughout 2017. Despite this growth, the company’s SEC applications did not identify cryptocurrency as a significant factor in year-over-year growth in gaming revenue until February 28, 2018, when its end-of-fiscal results were announced.

The Order considers that NVIDIA should have disclosed information about the impact of cryptocurrency on game sales earlier, in two of the company’s Forms 10-Q in 2017, as part of the discussion and analysis of the direction of the financial situation and the results of operations (” MD&A “). (Article 303 of the SK Regulation). According to the SEC’s press release announcing the Order (the “Press Release”), investors were entitled to receive information on “significant gains and fluctuations in cash flow related to a volatile business” so that they could “determine the probability of that past performance was indicative “. of future performance ”.

The press release states that the alleged omissions deceived investors because NVIDIA argued in the affirmative that other parts of the company’s business were positively affected by the demand for crypto, creating the false impression that its gaming business was not significantly affected by cryptocurrency .

The SEC’s claims were based on violations of sections 17 (a) (2) and (3) of the Securities Act of 1933, which provide for liability for misappropriation of investments, as well as section 13 (a) of the Exchange Act and rule 13a. . -13 under the same, which require reporting companies to submit complete and accurate quarterly reports. The order also includes an allegation that NVIDIA failed to maintain proper controls and disclosure procedures in violation of Rule 13a-15 (a) of the Exchange Act. It should be noted that the SEC has pursued its theory of omission under Section 17 (a) in addition to Section 13 (a), as Section 17 (a) requires the issuer to “obtain money or property by means of any misrepresentation of a material material “. fact or any omission to indicate a material fact necessary so that the statements made, in the light of the circumstances in which they were made, do not mislead “, or to induce conduct” which operates or would operate as fraud or deception on the part of the buyer “. However, the Order notes that the violation of these provisions does not require knowledge and may be based on a finding of negligence.

The Order is an important example of the ways in which cryptocurrencies are affecting non-cryptocurrency companies and the new risks that public companies must take into account when analyzing their business and disclosure obligations. Companies adjacent to cryptocurrencies may be affected by the volatile nature of cryptocurrency asset prices, and management should consider how this may affect revenue, risk factors, and other essential disclosure issues. In particular, companies should carefully consider whether additional disclosures are required when investing in digital assets as part of their capital management plans, accepting digital asset payments, or engaging in products or services that support cryptography-related activities, such as investing. mining, staking or DeFi. While it may be difficult, or even impossible in some cases, to determine the exact degree to which an issuer’s business is affected by the demand for cryptographic assets, the SEC states that investors are entitled to the best estimates of the issuer.

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