Navigating lengthy SEC reviews: key insights for crypto companies

Understanding the factors behind extended SEC review processes can help cryptocurrency companies proactively improve their disclosures, mitigate risks, and avoid prolonged regulatory scrutiny.

SEC comment letters are communications from the U.S. Securities and Exchange Commission (SEC) to public companies, typically issued after the SEC reviews a company's filings. These letters usually contain questions or requests for clarification about the company's financial disclosures, and companies are expected to respond promptly.

SEC comments are typically resolved within one or two rounds of comments issued throughout 40 to 60 days. Long SEC reviews – those that take more than 180 days – are rare because most of the issues raised by the SEC are likely to include minor improvements to disclosure. Yet, over the past several years, almost a dozen crypto companies struggled to respond to SEC comments promptly. Additionally, it is highly uncommon for an entire industry to have abnormally long reviews, indicating widespread issues or concerns affecting multiple companies within that sector.

Examining these SEC comments is important for other companies in the same industry because they provide insight into complex issues for which limited guidance exists, providing an opportunity to enhance the disclosure proactively without waiting for an SEC comment. Also, SEC comments are important for investors because the language of the letters may point to a missing material disclosure or possible accounting errors.

So, what issues were raised by the SEC, and why did it take so long for companies to address the inquiries? The table below provides a brief overview of the issues for a sample of companies with longer-than-average conversations with the SEC.

Note that the SEC review is still ongoing for two companies in the sample – namely, Stronghold Digital Mining Inc (Ticker: SDIG) and Cleanspark Inc (Ticker: CLSK). In these cases, the discussion is based on the disclosure in Item 1B, Unresolved Staff Comments. For Marathon Digital (Ticker: MARA), Ault Alliance, Inc (Ticker: AULT), Greenidge Generation Holdings, Inc (Ticker: GREE), and Terawulf (Ticker: WULF), I analyzed SEC comments publicly available on EDGAR.

Table 1 – Overview of issues raised in SEC comments letters for crypto companies with longer than the average SEC reviews

An interesting observation from the data is that the SEC raised many distinct issues. In contrast to the length (duration) of the review, which is frequently used as a proxy for the severity of the issues raised, the number of issues points to a breadth of the review – namely, the number of distinct areas of accounting or disclosure that could be enhanced. For instance, comments to Marathon Digital covered at least twenty distinct topics ranging from accounting for leases to revenue recognition practices, pointing to a broad review of the Company's financials.