SEC Staff Offers Crypto Disclosure Guidelines
On April 10, 2025, the SEC’s Division of Corporation Finance issued a nonbinding statement explaining the general application of existing disclosure requirements under the federal securities laws to crypto asset offerings, and provided example disclosures under certain requirements. The statement provided the following guidance concerning disclosures in crypto asset offering documents.
Description of Business. Regarding material information about the business, blockchain companies may include current or proposed business plans and the purpose of the applicable blockchain network or application and its operations. The staff stated that disclosures should generally avoid technical jargon and descriptions of crypto technologies immaterial to the business and should be consistent with other public disclosures, such as technical white papers.
Risk Factors. Blockchain-related business risk disclosure may relate to planned operations, cybersecurity, and reliance on another network or application. Risks relating to the crypto asset may include its form, price volatility, rights, valuation, liquidity, supply, and custody. Regulatory risks may include those regarding money transmission laws or federal or registration requirements with other federal or state regulators.
Description of Securities. Descriptions of the crypto asset should include its terms, rights, and specific characteristics. For example, disclosure of the rights, obligations, and preferences may include voting rights, dividend entitlements, network effects, transferability, and how these rights are memorialized. Technical specifications may include information on the blockchain technology used and its relation to alteration of rights, wallets and keys, transaction fees, asset divisibility, and whether such technology has been subject to third-party audit. Risk disclosure may also relate to the total supply of crypto tokens and how supply is controlled or maintained, as well as any contemplated arrangements with market makers.
Directors, Executive Officers, and Significant Employees. Disclosure regarding a third party performing critical functions may be included even if not a director, officer, or employee of the issuer. For example, directors and officers of a spot crypto exchange’s sponsor may perform functions similar to directors and officers of the exchange itself. Disclosure related to such a third party may be included, as well as any fees paid to such third parties.
Financial Statements. Issuers may contact the SEC with specific questions on financial statement requirements, especially those regarding unusual, complex, or innovative transactions.
Exhibits. If the rights, preferences and obligations of holders of subject securities are memorialized in smart contracts or otherwise contained in code, the issuer may file the code of the smart contract as an exhibit.
The Division emphasized that its statement does not address all material disclosure items, and that each issuer should consider its own facts and circumstances when preparing disclosures.
HHS Restructuring and Workforce Reductions – Key Implications for the Health Care Industry
As spring arrived in the mid-Atlantic region, the Department of Health and Human Services (HHS) under Robert F. Kennedy, Jr. followed through with a previously announced Reduction in Force (RIF) that reduced the department’s workforce by a reported 10,000 employees and started the process of restructuring the organization as a whole. Now that the dust is starting to settle, we are beginning to analyze the RIFs and how they could impact key health care stakeholders, including Medicare Advantage Plans, providers, and biopharmaceutical and medical device manufacturers. This post provides a brief overview of the restructuring to date, HHS’s reduction in workforce, and their potential impacts. We will continue to monitor these developments and provide future updates to Mintz clients and friends.
Overview of Restructuring & Workforce Reductions
As part of the department-wide restructuring plan, HHS is in the process of consolidating 28 different divisions into 15 divisions. As of April 4, 2025, it had also reduced the number of Regional Offices from ten to five. The March 27th press release initially announcing the restructuring stated that the current HHS organization contains many “redundant” units and that the restructuring plan will “centralize core functions” of the department, such as Human Resources, Information Technology (IT), Procurement, External Affairs, and Policy. Separately, on March 14th, HHS published an announcement about a reorganization with its Office of the General Counsel (HHS-OGC).
Although HHS has not released a comprehensive list of the offices directly impacted by the RIF as of the date of this post, HHS or independent news outlets have reported the following:
HHS Regional Offices: As noted above, HHS has reduced the number of Regional Offices to five. The remaining offices include those located in Philadelphia, Denver, Kansas City, Dallas, and Atlanta. Accordingly, it appears that HHS has closed its Regional Offices in New York, Boston, Chicago, Seattle, and San Francisco. The HHS-OGC also closed its office in Dallas.
Centers for Medicare & Medicaid Services (CMS): CMS reportedly lost approximately 300 employees. CNN reported that the RIFs included the entire Office of Equal Opportunity and Civil Rights. The Medicare-Medicaid Coordination Office lost its office of Models, Demonstrations and Analysis. At this time, it appears that the CMS central office divisions directly responsible for overseeing and setting policy for Medicare and Medicaid policy were not significantly impacted by the RIF. Further, numerous staff of the Administration of Community Living were terminated and that particular office may end up being shuttered.
Food & Drug Administration (FDA): The HHS press release announced that 3,500 full-time employees – or about 19% of FDA’s workforce – would be cut. All of the agency’s product centers experienced staffing reductions when the RIF began, with the drug, biologic, device, and tobacco centers hit particularly hard. Many of the individuals in longstanding FDA career leadership positions either have been terminated or have departed as part of the recent RIF or in the weeks leading up to it, including directors of the Center for Biologics Evaluation and Research (CBER), the Office of New Drugs within the Center for Drug Evaluation and Research (CDER), and the Digital Health Center of Excellence within the Center for Devices and Radiological Health (CDRH). HHS also terminated the FDA Chief Information Officer, a new leadership position created by the agency through planned modernization activities. Between the recent RIFs, voluntary retirements, and the earlier firings of probationary workers, CDER has apparently lost more than 1,000 employees over the past three months. Reports emerging from affected FDA staff also indicate that artificial intelligence experts have been disproportionately affected, with approximately 40 individuals out of the over 260 fired from CDRH coming from CDRH’s recently established Digital Health Center of Excellence, where very little knowledge redundancies existed. Policy-focused offices such as CDER’s Office of Medical Policy, CBER’s Office of Regulatory Operations, the CDRH Office of Women’s Health, and the Division of Policy Development within the Office of Generic Drug Policy, have been rendered effectively non-functional and are expected to be terminated during the departmental restructuring.
Centers for Disease Control and Prevention (CDC): Reports indicate that the CDC lost divisions related to workplace health and safety, HIV, injury prevention, reproductive health, smoking, and violence prevention, among others. All of the CDC’s staff working to process Freedom of Information Act (FOIA) requests were also terminated, per CBS reporting.
National Institutes of Health (NIH): There were a reported 1,300 employees laid off at the NIH, with NPR reporting that most of the cuts were to individuals with support positions such as communications, IT, and human resources. Grant and contract management officers were also affected, which may make it more difficult for research grantees – including those that are part of large academic medical centers – to obtain timely responses and information from the NIH.
In addition to these recent actions taking place within HHS, detailed agency-specific restructuring plans were due to be submitted to the White House Office of Management and Budget (OMB) on April 14, 2025, per an OMB memorandum issued in late February.
Potential Near-Term Impact on Selected Stakeholders
The RIFs and large-scale restructuring of HHS will impact the entire health care industry, with certain stakeholders facing more of the brunt in the short term. We address each of those stakeholder groups briefly below.
Medicare Advantage and Part D Plans
As of the date of this post, we understand that most CMS offices addressing Medicare Part C and Part D operations remain intact and were not significantly impacted by the RIF. However, all Medicare Advantage plans’ account managers are located in the HHS Regional Offices. Many Medicare Advantage (MA) and Part D plans likely lost their account managers and will need to be assigned new ones. This will result in those remaining account managers having increased caseloads, and being responsible for more plans. This is likely to result in delays in communication with account managers.
Health Care Providers
The consolidation of the Regional Offices will likely impact provider enrollment processes, provider surveying, Change of Ownership (CHOW) determinations and approvals, and the processing of CMS-specific enforcement activities, including reasonable assurance determinations. While CMS had previously transitioned certain Regional Office enrollment and survey functions for some provider types to CMS’s Center for Program Integrity and to the Medicare Administrative Contractors (MACs), the Regional Offices still play a key role in enrollment, surveys, and CHOW functions. For example, the Regional Offices of HHS-OGC advise on challenging CHOW questions and issues. HHS Regional Offices also still process and determine reasonable assurance periods. The consolidation of Regional Offices could create delays and bottlenecks for CHOW approvals, especially with more challenging CHOWs that require input from HHS-OGC.
The Regional Office consolidation will also impact provider audits performed by MACs, Unified Program Integrity Contractors, and other contractors. HHS-OGC provides oversight and training to these contractors and helps ensure uniformity in enforcement across regions. Consolidation and reduction in legal support to these entities may result both in delays in enforcement and inconsistent enforcement across providers.
Biopharmaceutical and Medical Device Manufacturers
The cuts to date of FDA staff have caused profound disruption at the agency and, in the short term, will almost certainly result in delays and longer timelines for approving new drugs, biological products, and innovative medical devices. With the firings of staff focused on digital health and artificial intelligence, it also seems likely that FDA will become more conservative when it comes to making policy, regulatory, and enforcement decisions in that space, depending upon the level of uncertainty at play. Developers of gene therapies, cell therapies, and rare disease treatments – who had benefitted from FDA’s increasing willingness to exercise “regulatory flexibility” and approve such products in the face of scientific uncertainty – also may see a marked shift now that the agency’s institutional expertise and leadership in those areas have been decimated. This puts more cutting-edge and innovative products at greater risk of not receiving FDA marketing approvals than they had pre-RIF. Concerns about delays in medical product reviews and a potential increase in denied applications are being exacerbated by the likelihood that developers will have a more difficult time getting informal and formal feedback from the agency, as a result of fewer employees and the fact that reviewers will no longer have regulatory policy, research, or administrative colleagues (among others) to support that complex work. Indeed, around April 11, 2025 a nonpartisan and highly experienced group of investors and executives from the medical products research and development enterprise sent a letter to Senate leadership expressing their alarm at what is occurring at FDA and describing slowdowns and bottlenecks that are already manifesting as a result of the RIF.
In addition, although HHS’s restructuring announcement stated that “those with roles in drug, medical device or food reviews or inspections” would not be adversely affected, in reality, the continuity and timeliness of both review activities and inspections will be harmed by the loss of nearly 25% of FDA’s workforce since January 2025. For example, inspections of manufacturing facilities cannot take place if the teams can’t get to the site – but press reports indicate that support staff in the Office of Inspections and Investigations that handle travel and other logistics have been terminated. Facility inspections occur not only to monitor the safety of American foods, medicines, and devices but also to support new product approvals, so delays in the agency’s inspectional functions may negatively affect the approval and launch of medical products. The ability to convene advisory committee meetings, which in some cases are required by law prior to a new product approval, is also likely to be adversely impacted without support staff to organize such large-scale events.
Finally, from a general FDA mission standpoint, the apparently haphazard nature of the RIF also means that industry complaints about non-compliance by competitors will likely go un-investigated and enforcement actions will decrease across the board. While the possibility of less enforcement may sound good to a regulated company, in practical effect a weaker FDA will make patient injuries, tort lawsuits, and expensive legal challenges by competitors much more likely. And the significant loss of FOIA and public communications staff from the agency will make obtaining documents about competitors, similar products, FDA’s analyses of certain regulatory issues, and other such valuable information much slower, if not impossible, for industry and the public alike.
SEC Issues Crypto Securities Disclosure Statement as IRS DeFi Broker Rule Repealed
The Securities and Exchange Commission (SEC) Division of Corporation Finance issued a new statement about SEC staff’s experience with SEC disclosure requirements for crypto-related offerings that qualify as securities. The statement distinguishes between tokens that are themselves securities, those sold as part of investment contracts, and those falling completely outside SEC jurisdiction, but does not purport to give guidance on the application of the Howey test. This statement follows the SEC’s recent statements on memecoins, proof-of-work mining and stablecoins, continuing the SEC’s efforts to provide incremental clarity on the regulation and classification of digital assets.[1]
Separately, President Donald Trump eliminated the controversial Internal Revenue Service (IRS) digital asset broker reporting rule, which would have required decentralized finance (DeFi) platforms (including front-ends) to collect and report taxpayer information like traditional brokers, despite their fundamental technological differences.[2]
SEC Division of Corporation Finance Provides Disclosure Information for Crypto Securities
The SEC’s Division of Corporation Finance issued a statement sharing its observations and recommendations on disclosure practices for crypto-related securities. Rather than creating new requirements, the Division explained how existing disclosure frameworks apply to two scenarios: companies issuing traditional (debt or equity) securities while operating in the crypto space, and offerings involving cryptoassets that constitute investment contracts.
Notably, the Division clarified that “[n]othing in this statement is intended to suggest that registration or qualification is required in connection with an offering of a crypto asset if the crypto asset is not a security and not part of or subject to an investment contract,” acknowledging the diverse nature of cryptoassets and again confirming that coins or tokens can be offered outside the SEC registration regime.
The Division’s observations focused on how companies have applied disclosure requirements across various SEC forms and regulations to crypto offerings (including forms used by foreign private issuers and Regulation A offerings). For business description disclosures, the Division has observed effective practices that explain network architecture, consensus mechanisms, transaction validation, and governance systems. Similarly, for risk factor disclosures, companies have addressed technology vulnerabilities, cybersecurity concerns and regulatory uncertainties specific to crypto operations.
Regarding securities descriptions, the Division highlighted examples of effective practices it has observed, including detailed explanations of holder rights, technical specifications for accessing and transferring assets, and information about token supply mechanisms. The guidance also addressed disclosures about directors and executive officers, noting that even if a crypto entity lacks traditional management roles, disclosure about those performing similar functions is still required.
Commissioner Hester Peirce issued a separate statement characterizing the Division’s observations as “a small step in identifying relevant disclosures so that investors have material information about the projects and businesses in which they are investing.” She noted that the statement might be helpful for four specific categories of companies: (1) those developing a blockchain and issuing debt or equity; (2) those registering the offering of an investment contract in connection with initial coin offerings; (3) those issuing crypto assets that themselves are securities; and (4) those integrating non-fungible tokens into video games and is issuing debt or equity.
Presidential Action Ends Controversial IRS DeFi Broker Rule
President Trump signed legislation eliminating the IRS’s digital asset broker reporting rule, becoming the first US president to sign a crypto-specific bill into law. The rule, finalized in the closing days of the Biden administration, would have required DeFi platforms to comply with tax reporting requirements designed for traditional brokers. The rule had previously been challenged in a December 2024 lawsuit filed by three digital asset organizations, which argued it violated the Fourth and Fifth Amendments and exceeded the IRS’s statutory authority.[3]
[1]See Katten’s Quick Reads posts on the Division’s recent guidance here and here.
[2]See Katten’s Quick Reads post on the IRS digital asset broker reporting rule here.
[3]Id.
German Federal Labor Court Finds Certain Virtual Stock Option Forfeiture Clauses May Unreasonably Disadvantage Employees
On March 19, 2025, the German Federal Labor Court (Bundesarbeitsgericht or BAG) held in Case No.: 10 AZR 67/24 that certain forfeiture clauses in General Terms and Conditions of Business (Allgemeine Geschäftsbedingungen or AGB) regarding the expiration of virtual stock options upon termination of employment are invalid.
Quick Hits
The German Federal Labor Court ruled on March 19, 2025, that certain forfeiture clauses in General Terms and Conditions of Business regarding the expiration of virtual stock options upon termination of employment are invalid.
The court found that such forfeiture clauses unreasonably disadvantage employees by not adequately considering the work already performed and the associated entitlement to the options.
International companies might benefit from decoupling employee ownership at least from the German employment relationship to avoid legal uncertainties and enhance the attractiveness of their programs.
Background
Virtual stock options are a popular form of employee ownership. They allow employees to participate in the economic success of the company without actually purchasing shares. These options are often subject to certain conditions, such as length of service. Employees often acquire rights to virtual options in different tranches. This staggered acquisition of rights is called vesting. In addition, the exercise of vested rights is often dependent on an event beyond the employee’s control, such as an initial public offering (IPO) of the company. This often results in a situation where the value of virtual stock options can only be realized after a significant delay.
Many programs contain clauses that provide for the forfeiture of vested options when the employee leaves the company. The German Federal Labor Court has now ruled that such forfeiture clauses can be invalid if they unreasonably disadvantage the employee.
Case History
In the present case, the plaintiff was employed by the defendant from April 1, 2018, to August 31, 2020. The employment relationship was terminated by a timely voluntary resignation. In 2019, the plaintiff received and accepted an offer to be granted twenty-three virtual stock options. According to the employee stock option plan (ESOP), the exercise of the options required their exercisability after the expiration of a vesting period and an exercise event such as an IPO. The options could generally be exercised in stages after a minimum waiting period of twelve months within a total vesting period of four years.
At the time of the plaintiff’s resignation, 31.25 percent of the options granted to the plaintiff were vested.
The defendant rejected the plaintiff’s claim to these options based on the forfeiture clauses. The plaintiff argued that the forfeiture clauses were invalid because the options were an integral part of his compensation package.
The German Federal Labor Court’s Ruling
The Tenth Senate of the German Federal Labor Court ruled in favor of the plaintiff and found the following: the vested virtual stock options had not expired; the forfeiture clauses in the ESOP unreasonably disadvantaged the employee and were therefore invalid; the vested options constituted compensation for the work performed by the plaintiff; and the immediate forfeiture upon termination of employment did not adequately take into account the employee’s interests and was contrary to the legal concept of Section 611a (2) of the German Civil Code (BGB). In addition, the court found that the termination of the vested virtual stock options could be seen as an unjustified restriction to end the employment and seek a new job.
Issue of Restricted Exercisability Upon Voluntary Resignation
A key issue highlighted by the BAG in its decision is the restricted exercisability of options in the event of voluntary termination by the employee. These clauses unreasonably disadvantage the employee because they do not sufficiently consider the work already performed and the associated entitlement to the options. The immediate or accelerated forfeiture of already vested options upon voluntary resignation constitutes an unfair disadvantage and may act as a disincentive to resign, as employees may refrain from resigning in order to avoid financial losses.
In particular, international companies could consider decoupling employee ownership from the employment relationship and structuring it according to a different legal regime. This can help avoid legal uncertainty and make the programs more flexible and attractive to employees.
Cyber Risks: Is Your Business Exposed?
In today’s interconnected digital landscape, cybersecurity has emerged as a critical concern for businesses across all sectors. The increasing frequency and sophistication of cyber threats necessitates a comprehensive understanding of both legal and financial implications associated with cyber risks. This article delves into the essential legal and financial terms related to cybersecurity to highlight their significance and provide insights into best practices for mitigating risk.
Defining ‘Cyber Risk’
Cyber risk refers to the potential for financial loss, disruption, or damage to an organization’s reputation due to failures in its information technology systems. These risks can arise from various sources, including cyberattacks, data breaches, system failures, or unauthorized access to sensitive information. Understanding cyber risk involves assessing both the impact a cyber incident can cause and the probability of such an incident occurring.
Sean Griffin, partner at Longman & Van Glack, underscores the legal liabilities of data breaches, explaining that failure to implement proper cybersecurity controls could expose companies to litigation and government enforcement actions.
The Role of Risk Management
Effective risk management is crucial in identifying, assessing, and mitigating cyber risks. Organizations typically adopt one or more of the following strategies:
Risk Acceptance: Acknowledging the risk and choosing to accept it without implementing additional controls, often because the cost of mitigation exceeds the potential loss.
Risk Avoidance: Eliminating activities that introduce risk, thereby avoiding the potential threat altogether.
Risk Mitigation: Implementing measures to reduce the likelihood or impact of a cyber incident, such as deploying security technologies or enhancing employee training.
Risk Transfer: Shifting the financial consequences of a risk to a third party, typically through purchasing cyber insurance policies.
Legal Frameworks and Regulations
Navigating the complex landscape of cybersecurity requires adherence to various legal frameworks and regulations designed to protect data and ensure organizational accountability. The legal framework governing the mitigation and prevention of cyber-risks includes federal and state regulations like the following:
Federal Trade Commission (FTC) Safeguards Rule
The FTC’s Safeguards Rule mandates that financial institutions develop, implement, and maintain comprehensive information security programs to protect customer information. The rule was updated to include more specific requirements, such as designating a qualified individual to oversee cybersecurity compliance, conducting regular risk assessments, and implementing access controls and encryption. Notably, the definition of ‘financial institutions’ has been expanded to encompass a broader range of companies, increasing the scope of entities required to comply.
New York Department of Financial Services (NYDFS) Cybersecurity Regulation
The NYDFS Cybersecurity Regulation (23 NYCRR Part 500) establishes cybersecurity requirements for financial services companies operating in New York. The regulation requires entities to implement a cybersecurity program, adopt a written policy, designate a Chief Information Security Officer (CISO), and comply with various technical controls. Recent amendments have introduced more stringent requirements, such as enhanced governance obligations and expanded definitions of key terms, reflecting the evolving nature of cyber threats.
Securities and Exchange Commission (SEC) Cybersecurity Disclosure Rules
The SEC has implemented rules requiring publicly traded companies to disclose material cybersecurity incidents within four business days of determining their materiality. This mandate emphasizes the importance of transparency and timely communication with investors regarding cyber risks and incidents. The disclosure should include the nature, scope, and potential impact of the incident on the company’s operations and financial condition.
Jonathan Friedland of Much Shelist emphasizes the importance of transparency in cybersecurity. He highlights that businesses must disclose cyber risks and incidents promptly to avoid regulatory scrutiny and loss of trust.
Financial Implications of Cyber Risks
Cyber incidents can have profound financial consequences for businesses, including direct costs such as regulatory fines, legal fees, and remediation expenses, as well as indirect costs like reputational damage and loss of customer trust.
Key financial considerations include:
Cyber Insurance
To mitigate potential financial losses from cyber incidents, organizations often invest in cyber insurance policies. These policies can cover various expenses, including data breach notifications, legal fees, and business interruption losses. However, it’s essential for organizations to thoroughly understand the terms, coverage limits, and exclusions of their policies to ensure adequate protection.
Regulatory Fines and Penalties
Non-compliance with cybersecurity regulations can result in substantial fines and penalties. For instance, under the updated FTC Safeguards Rule, financial institutions that fail to implement required security measures may face enforcement actions. Similarly, the NYDFS Cybersecurity Regulation imposes penalties on entities that do not adhere to its stringent requirements.
Best Practices for Cybersecurity
To strengthen cybersecurity defenses, organizations should adopt the following best practices:
Implement a Robust Incident Response Plan: The term, ‘Incident Response Plan’ (IRP), refers to a documented strategy outlining the procedures an organization will follow in the event of a cybersecurity incident. It typically includes steps for detection, containment, eradication, recovery, and post-incident analysis to mitigate damage and prevent future occurrences. Alex Sharpe of Sharpe Consulting suggests continuous monitoring and real-time threat detection rather than a solely reactive approach to cyber incidents.
Conduct Regular Security Audits and Risk Assessments: Identifying vulnerabilities proactively helps in mitigating potential threats before they are exploited.
Enhance Employee Training and Awareness Programs: Employees are the first line of defense against cyber threats; regular training can reduce human error and increase vigilance.
Encrypt Sensitive Data: Data encryption can protect critical information even if it is intercepted or stolen.
Utilize Multi-Factor Authentication (MFA): Enforcing MFA across all systems can significantly reduce the risk of unauthorized access.
Monitor and Respond to Threat Intelligence: Keeping up-to-date with emerging threats and attack trends allows organizations to adjust their defenses accordingly.
Conclusion
As cyber threats continue to evolve, businesses must remain vigilant in safeguarding their digital assets. Implementing proactive security measures, adhering to regulatory requirements, and fostering a culture of cybersecurity awareness are crucial for mitigating risk.
Cybersecurity is not merely an IT issue but a fundamental business imperative that impacts legal, financial, and operational stability. By staying informed, leveraging best practices, and continuously updating security protocols, organizations can enhance their resilience against cyber threats and protect their most valuable assets — data, reputation, and customer trust.
To learn more about this topic, view Corporate Risk Management / Cyber Risks: Every Business is Exposed Whether You Know it or Not. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about cybersecurity.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
April Welcomes More Flexible Co-Investment Exemptive Relief Under the Investment Company Act of 1940
On April 3, the US Securities and Exchange Commission (SEC) approved an exemptive application1 that allows for a more flexible co-investment transaction approval process. This new relief simplifies the process followed by investment managers under prior co-investment exemptive orders to approve the participation of business development companies (BDCs) and/or registered closed-end funds (together with BDCs, Regulated Funds) when making negotiated2 co-investments together with affiliated funds, where such joint transactions would otherwise be prohibited by the Investment Company Act of 1940, as amended (the 1940 Act), and the rules and regulations thereunder. Although the new exemptive relief is still subject to certain conditions, compared to previous co-investment exemptive orders, the new exemptive relief provides the following benefits.
Subject to the implementation of certain policies and procedures, the board of directors (the Board) of a Regulated Fund does not need to approve co-investment transactions in advance except for the transactions described in the bullet below.
A majority vote of the independent directors of the Regulated Fund (a Required Majority) will only be necessary to approve a negotiated co-investment transaction if (i) the Regulated Fund is investing into an issuer where an Affiliated Entity3 has an existing interest in such issuer, or (ii) the transaction is a non-pro rata follow-on investment or a non-pro rata disposition of an investment.
Previously, Regulated Funds were prohibited from participating in a co-investment transaction if certain Affiliated Entities had an existing investment in the subject issuer.
Moreover, the previous form of relief did not permit a Regulated Fund to participate in a follow-on investment, unless (i) the Regulated Fund participated in the initial co-investment and continues to hold an investment in the subject issuer or (ii) Affiliated Entities had no existing investment in the subject issuer. With this restriction now removed, Regulated Funds may participate in follow-on investments with their Affiliated Entities even if the Regulated Fund has no existing investment in the subject issuer.
Joint Ventures,4 funds that are sub-advised by a sponsor without requiring the adviser and sub-adviser to be affiliated, and entities relying on any provision of Section 3(c) under the 1940 Act, are now able to participate in negotiated co-investment transactions on the same terms as Regulated Funds and Affiliated Entities. Previous co-investment relief generally did not allow these types of entities (other than entities relying on the exemptions in Sections 3(c)(1), 3(c)(5)(C), and 3(c)(7) of the 1940 Act) to participate in negotiated co-investments in reliance on the exemptive relief.
Investment managers now have more discretion with respect to their investment allocation process under this new relief, so long as investment managers adopt and implement co-investment policies and procedures that are reasonably designed to prevent the Regulated Fund from being disadvantaged in the co-investment program. Prior to participation in co-investment transactions, the Regulated Fund’s Board needs to approve the policies and procedures and then must oversee the Regulated Fund’s participation in the co-investment program in the exercise of the Boards’ reasonable judgment.
Relief Conditions
In addition to the benefits described above, set forth below is a summary of the conditions of the new co-investment exemptive relief.
Regulated Funds and Affiliated Entities will still be required to acquire or dispose of investments generally on the same terms.5 If the transaction is a non-pro rata follow-on investment or non-pro rata disposition, then Required Majority approval will be necessary.
As indicated above, for a Regulated Fund to invest in an issuer in which such Regulated Fund is not an existing investor, but an Affiliated Entity is an existing investor, a Required Majority must approve such Regulated Fund’s participation in the transaction.
Any expenses associated with acquiring, holding or disposing of securities acquired in a co-investment transaction must be shared among the participants in proportion to the relative amounts of securities being acquired, held or disposed.
Affiliated Entities must continue to share transaction fees (including break-up, structuring, monitoring or commitment fees but excluding broker’s fees contemplated by Sections 17(e) or 57(k) of the 1940 Act, as applicable) with Regulated Funds and other Affiliated Entities participating in a co-investment transaction pro rata based on the amount invested or committed. No Affiliated Entity can accept any other compensation in connection with a co-investment transaction.
As discussed above, investment managers must adopt co-investment policies designed to prevent the Regulated Fund from being disadvantaged in the co-investment program. The Regulated Fund’s Board then must approve the policies and oversee the Regulated Fund’s participation in the co-investment program.
Prior to any disposition by an Affiliated Entity of an investment acquired in a co-investment transaction, the adviser to a Regulated Fund that participated in the co-investment transaction will be notified, and the Regulated Fund will be given the opportunity to participate pro rata based on the proportion of its holdings relative to the other Affiliated Entities participating. In a co-investment transaction, prior to any non-pro rata disposition of an investment by a Regulated Fund or if a disposition is not a sale of a Tradable Security,6 the Required Majority must approve the disposition.
At least quarterly, the Regulated Fund’s adviser and chief compliance officer (“CCO”) will be required to provide reports to the Regulated Fund’s Board regarding the Regulated Fund’s participation and activity in co-investment transactions and a summary of deemed significant matters that arose during the period related to the implementation of the adviser’s co-investment policies and procedures and the Regulated Fund’s policies and procedures.
Each year, the adviser and CCO must provide information requested by the Regulated Fund’s Board related to the Regulated Fund’s participation in the co-investment program and any material changes in the Affiliated Entities’ participation in the co-investment program, including changes to the Affiliated Entities’ co-investment policies.
The adviser and the CCO must also notify the Regulated Fund’s Board of any compliance matters related to the Regulated Fund’s participation in the co-investment program that the CCO considers to be material.
All information presented to the Regulated Fund’s Board must be safeguarded for the life of the Regulated Fund and two years after, which will be subject to SEC examination.
Similar to the applications and orders for the new multi-share class exemptive relief, as highlighted in Katten’s advisory published last week, investment managers will need to individually apply for and obtain the new co-investment exemptive relief.
1 FS Credit Opportunities Corp., et al, SEC Rel. No. IC-35520 (April 3, 2025). Unless there is a request for a hearing, the approval will become effective after a 25-day notice period.
2 The applications did not seek relief for transactions effected consistent with staff no action positions (See, e.g., Massachusetts Mutual Life Insurance Co. (pub. avail. June 7, 2000), Massachusetts Mutual Life Insurance Co. (pub. avail. July 28, 2000) and SMC Capital, Inc. (pub. avail. Sept. 5, 1995)). In general, these positions allow co-investing with an affiliate if the only term of the investment that is negotiated is price.
3 “Affiliated Entity” means an entity not controlled by a Regulated Fund that intends to engage in co-investment transactions and that is (a) with respect to a Regulated Fund, another Regulated Fund; (b) an adviser to the Regulated Fund or its affiliates (other than an open-end investment company registered under the 1940 Act), and any direct or indirect, wholly- or majority-owned subsidiary of an adviser to the Regulated Fund or its affiliates (other than of an open-end investment company registered under the 1940 Act), that is participating in a co-investment transaction in a principal capacity; or (c) any entity that would be an investment company but for Section 3(c) of the 1940 Act or Rule 3a-7 thereunder and whose investment adviser is an adviser to the Regulated Fund.
4 “Joint Venture” means an unconsolidated joint venture subsidiary of a Regulated Fund, in which all portfolio decisions, and generally all other decisions in respect of such joint venture, must be approved by an investment committee consisting of representatives of the Regulated Fund and the unaffiliated joint venture partner (with approval from a representative of each required).
5 “Same terms” means the same class of securities, at the same time, for the same price and with the same conversion, financial reporting and registration rights, and with substantially the same other terms.
6 “Tradable Security” means a security which trades: (i) on a national securities exchange (or designated offshore securities market as defined in Rule 902(b) under the Securities Act of 1933, as amended) and (ii) with sufficient volume and liquidity (findings which are to be made in good faith and documented by the advisers to any Regulated Fund) to allow each Regulated Fund to dispose of its entire remaining position within 30 days at approximately the price at which the Regulated Fund has valued the investment.
Are Many Nasdaq Global Select Corporations Subject To The California General Corporation Law?
Only a few publicly traded corporations are incorporated in California. Most either started life in Delaware or later decamped to that state (and more recently other states). Nonetheless, many of these corporations have their principal offices in California and/or significant operations and shareholders located in California. The Golden State has long been sensitive to the phenomenon of pseudo-foreign, or “tramp”, corporations. In response, it has peppered its General Corporation Law with provisions that expressly apply to foreign corporations, provided they have certain specified nexus to the state. The most far-reaching of these provisions is Section 2115 which imposes numerous provisions of the GCL to foreign corporations “to the exclusion of the law of the jurisdiction in which it is incorporated”. In general, a foreign corporation will be subject to 2115 if more than one-half of its business and one-half of its shares are held of record by persons with addresses in California (there is, of course, much more detail in the statute, but hanc marginis exiguitas non caparet.
Corporations listed on major stock exchanges for the most part do not perseverate excessively over Section 2115 because the statute expressly exempts “with outstanding securities listed on the New York Stock Exchange, the NYSE American, the NASDAQ Global Market, or the NASDAQ Capital Market”. On closer inspection, however, there appears to be a noticeable omission in this list of exchanges. Nasdaq has three listing tiers, the Nasdaq Global Select Market, the Nasdaq Global Market, and the Nasdaq Capital Market, and the statute only lists the last two tiers. The omission of the Nasdaq Global Select Market is unlikely to have been intentional because that market has the highest listing criteria. Apparently, the omission arises from California’s view that the Nasdaq Global Market itself is comprised of two tiers. Apparently, this was the view of the Commissioner of Corporations when he certified the Nasdaq Global Market for purposes of an exemption under the Corporate Securities Law of 1968: “Moreover, effective July 1, 2006, the Nasdaq National Market was renamed the NASDAQ Global Market. The NASDAQ Global Market now contains two tiers (NASDAQ Global Market and NASDAQ Global Select Market) . . .”. The Commissioner, however, has no authority to administer or enforce Section 2115.
Some readers will likely protest that Section 2115 is unconstitutional. Indeed, that was the conclusion of the Delaware Supreme Court in Vantage Point Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005). However, a California Court of Appeal has arrived at the opposite conclusion in Wilson v. Louisiana-Pacific Resources, Inc., 138 Cal. App. 3d 216, 187 Cal. Rptr. 852 (1983). Therefore, the status of Section 2115 may depend upon where the case is brought.
DExit And The Concomitant Malapropisms Continue
On Friday, the global entertainment company, AMC Networks Inc., filed preliminary proxy materials that include a proposal to approve the company’s “redomestication to the State of Nevada by conversion”. Readers will recognize that this statement makes no sense because it conflates two different processes, domestication and conversion. See Converting A Corporation Is Not Domestication.
Hong Kong SFC’s New Roadmap to Develop Hong Kong as a Global Virtual Asset Hub: ASPIRe
The Hong Kong Securities and Futures Commission (SFC) has recently unveiled a growth plan for the virtual asset (VA) industry, outlined in a five-pillar roadmap called “A-S-P-I-Re.” This roadmap consists of 12 initiatives organized into five categories: Access, Safeguards, Products, Infrastructure, and Relationships.
Pillar “A” (Access) – Expanding Opportunities for Investors
Initiative 1: Establish Licensing for OTC Trading and Custody Services
The SFC will support a licensing framework for over-the-counter (OTC) trading, ensuring parity between OTC operators and VA trading platforms (VATPs). A separate licensing regime for custody services will create a two-tier structure for trading and custody.
Initiative 2: Attract Global Platforms and Liquidity Providers
The SFC aims to encourage international VA platforms to set up local operations and streamline onboarding for institutional-grade liquidity providers, enhancing market liquidity.
Pillar “S” (Safeguards) – Balancing Investor Protection with Flexible Regulations
Initiative 3: Dynamic Custody Technologies
The SFC will explore emerging custody technologies, moving away from rigid cold storage mandates to more flexible and security-focused frameworks.
Initiative 4: Enhance Insurance and Compensation Frameworks
The SFC will align compensation and insurance requirements with global standards, allowing VA service providers to tailor their arrangements.
Initiative 5: Clarify Onboarding and Product Categorization
The SFC will clarify investor onboarding processes and create a classification system for VA products based on their nature and associated risks.
Pillar “P” (Products) – Diversifying VA Offerings
Initiative 6: Regulatory Framework for Professional Investors
The SFC will consider allowing professional investors to participate in new token listings and trade VA derivatives, contingent on due diligence and risk management.
Initiative 7: Margin Financing Requirements
The SFC will introduce margin financing requirements for VA, making it easier for traditional finance to engage with familiar risk practices.
Initiative 8: Staking and Borrowing/Lending Services
The SFC will evaluate the possibility of allowing staking and borrowing/lending services for professional investors, supported by appropriate risk management safeguards. As a follow-on action, on 7 April 2025, the SFC issued guidelines on licensed VATPs and authorized funds in relation to the provision of staking services.
Pillar “I” (Infrastructure) – Improving Market Monitoring and Collaboration
Initiative 9: Advanced Reporting and Surveillance Tools
The SFC will implement blockchain analytics tools and transaction monitoring systems to combat fraud and market misconduct.
Initiative 10: Strengthen Cross-Agency and Cross-Border Collaboration
The SFC will promote local and global collaboration to establish a comprehensive framework for risk monitoring and asset recovery.
Pillar “Re” (Relationships) – Fostering Education, Engagement, and Transparency
Initiative 11: Guidelines for Financial Influencers
The SFC will introduce guidelines for financial influencers (Finfluencers) to encourage responsible communication and protect investor interests.
Initiative 12: Build a Sustainable Communication and Talent Network
The SFC will work with stakeholders through the Virtual Asset Consultative Panel and support training programs.
Conclusion
The A-S-P-I-Re roadmap presents a comprehensive strategy to sustain Hong Kong’s VA market by integrating traditional finance with blockchain innovation. By addressing regulatory gaps and promoting collaboration, the SFC is positioning Hong Kong as a global leader in the VA industry.
SEC Clarifies Stance on Reserve-Backed Stablecoins
On April 4, 2025, the U.S. Securities and Exchange Commission took a step towards clarifying its position on the regulatory status of reserve-backed stablecoins. In a recent statement, the SEC’s Division of Corporation Finance determined that certain types of stablecoins, specifically those designed to maintain a stable value relative to the U.S. dollar and backed by low-risk, liquid assets, do not constitute securities. The Division reasoned that these “covered stablecoins” are intended to offer stability and reliability, making them distinct from other digital assets that may be subject to securities laws. In arriving at this determination, the Division applied two primary tests based on prior case law: the Reves “family resemblance” test and the Howey Test.
The Reves “family resemblance” test examines four factors to determine whether an instrument resembles a security. The Division concluded that under this test, covered stablecoins do not resemble securities, noting that (1) covered stablecoins are issued and purchased for commercial purposes rather than investment, with buyers motivated by stability and utility in transactions rather than profit potential; (2) covered stablecoins are distributed in a manner that emphasizes payment functionality rather than investment returns; (3) the public generally views these stablecoins as a means of payment rather than an investment; and (4) adequately funded reserves significantly reduce risks, drawing parallels to traditional collateralization.
The Howey Test examines whether an instrument is a security if it otherwise involves an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The Division found that covered stablecoins do not meet these criteria as they are primarily used for payment rather than profit.
However, SEC Commissioner Caroline A. Crenshaw issued a dissenting statement, expressing concerns about the analysis employed. Commissioner Crenshaw argued that the statement’s legal and factual errors paint a distorted picture of the USD-stablecoin market and drastically understate its risks. She highlighted the role of intermediaries in stablecoin distribution and redemption, which she argued pose additional risks the Division did not fully consider.
The Division noted that this statement, like all staff statements, has no legal force or effect; however, the statement may have an impact on the stablecoin industry. Stakeholders are encouraged to stay informed and engaged as the regulatory landscape progresses.
SEC’s Division of Corporation Finance: Stablecoins Are Not Securities
On April 4, the Division of Corporation Finance of the US Securities and Exchange Commission (SEC) issued a statement providing clarity on the application of federal securities laws to stablecoins, specifically those designed to maintain a stable value relative to the US Dollar (USD).
This statement outlines the characteristics of “Covered Stablecoins” and asserts that their offer and sale do not constitute securities under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Stablecoins Overview
Stablecoins are a type of crypto asset designed to maintain a stable value relative to a reference asset, such as USD, other fiat currencies, commodities such as gold, or a pool of assets. Issuers typically offer and sell stablecoins on a one-for-one basis corresponding with the reference asset (e.g., 1 stablecoin = 1 USD). They may use various mechanisms to maintain stability, including algorithms used to adjust supply in response to demand. The risks associated with stablecoins vary based on their stability mechanisms and reserve maintenance.
The Division’s View on Covered Stablecoins
The Division has determined that the offer and sale of Covered Stablecoins, as described in the statement, do not involve the offer and sale of securities. Consequently, transactions involving the minting and redeeming of Covered Stablecoins do not need to be registered with the SEC under the Securities Act, nor must they fall within any exemptions from registration.
Characteristics of Covered Stablecoins
Covered Stablecoins are designed and marketed for use as a means of making payments, transmitting money, or storing value. They maintain a stable value relative to USD and are backed by either USD or any other low-risk, readily liquid assets held in a reserve. These assets meet or exceed the redemption value of the stablecoins in circulation. Covered Stablecoin issuers ensure price stability by minting and redeeming these stablecoins on a one-for-one basis with USD. There is no limitation on the amount of Covered Stablecoins an issuer can mint or redeem. Stablecoins may be offered directly from the issuer or through a designated intermediary. If the holder of the coin purchases through an intermediary, that holder cannot redeem directly with the issuer. The holder must redeem their coins with the intermediary who then redeems with the issuer. The Division notes that designated intermediaries eligible to deal directly with issuers can engage in arbitrage to keep market prices stable relative to redemption prices.
Marketing of Covered Stablecoins
Covered Stablecoins are marketed solely for use in commerce and not as investments. Marketing materials emphasize their stability, reliability, and accessibility for making payments and storing value. They are often likened to a “digital dollar” and do not offer any interest, profit, or ownership rights. Marketing stablecoins as a value-storing device is an indication that stablecoins are not securities.
The Reserve
Proceeds from the sale of Covered Stablecoins are used to acquire assets held in a pooled account called a “Reserve.” These assets are used solely to honor redemptions and are not commingled with the issuer’s assets or used for operational purposes. The Reserve is designed to fully back the outstanding Covered Stablecoins on a one-for-one basis. Issuers may publish reports called “proof of reserves” reports which demonstrate the issuer has enough reserve to redeem their stablecoins.
Legal Analysis
The Division analyzed Covered Stablecoins under the Reves v. Ernst & Young [1] and SEC v. W.J. Howey Co. [2] tests and concluded that Covered Stablecoins are not securities.
The Reves Test
Because the Division likens stablecoins with a debt instrument, it started its analysis with the Reves test. The Reves test considers factors such as the motivations of the seller and buyer, the plan of distribution, the reasonable expectations of the investing public, and risk-reducing features. All factors are given equal weight. Under the Reves factors, the Division determined Covered Stablecoins are not securities because they are not marketed as investments and are used for commercial purposes.
The Howey Test
Although the Reves test indicated Covered Stablecoins are not securities, the Division also performed an analysis under Howey, the test most used to determine whether something is an “investment contract” and thus a security. The Howey test examines whether there is an investment of money in a common enterprise with an expectation of profits derived from the efforts of others. The Division concluded that Covered Stablecoins are not securities under the Howey test because buyers are not motivated by an expectation of profit when purchasing stablecoins. Rather, buyers use these Covered Stablecoins for consumer purposes and as a value-storing device.
Conclusion
The Division’s statement clarifies that Covered Stablecoins, as described, are not considered securities under federal securities laws. This determination provides greater regulatory clarity for issuers and users of stablecoins designed to maintain a stable value relative to USD. However, note that the statement represents the views of the staff of the Division of Corporation Finance and does not have legal force or effect. It does not alter or amend applicable law and creates no new or additional obligations for any person.
For our client alert addressing SEC Commissioner Caroline Crenshaw’s criticism of the Division’s statement concluding that Covered Stablecoins are not securities, see here: SEC Commissioner Crenshaw Critiques Stable Coin Analysis: Understates the Risks
[1] Reves v. Ernst & Young, 494 US 56, 63 (1990).
[2] SEC v. W.J. Howey Co., 328 US 293, 297 (1946).
Justice Department Issues Memorandum Realigning DOJ’s Crypto Enforcement Efforts
On April 7, 2025, U.S. Deputy Attorney General Todd Blanche issued a memorandum titled “Ending Regulation by Prosecution” (Blanche Memo), outlining a new Department of Justice approach to digital asset enforcement. The Blanche Memo discusses the DOJ’s intent to focus its prosecutorial efforts away from crypto intermediaries and instead targeting “individuals who victimize digital asset investors, or those who use digital assets in furtherance of criminal offenses such as terrorism, narcotics and human trafficking, organized crime, hacking, and cartel and gang financing.” Further, the Blanche Memo emphasizes that “[t]he digital assets industry is critical to the Nation’s economic development and innovation,” and the memorandum is being issued pursuant to President Trump’s directive to “end the regulatory weaponization against digital assets.”
Background
A brief review of the DOJ’s recent crypto strategy provides background and context to the Blanche Memo. Under the Biden administration, the federal government expanded its prosecutorial activity in the digital asset space. As part of that activity, the DOJ established the National Cryptocurrency Enforcement Team (NCET) and the White House announced what it called the “First-Ever Comprehensive Framework For Responsible Development of Digital Assets.” The Biden DOJ brought multiple prosecutions targeting intermediaries, such as crypto exchanges. As an example, the DOJ charged HDR Global Trading Limited, also known as “BitMEX,” with Bank Secrecy Act violations after BitMEX allegedly: (i) provided cryptocurrency trading services to U.S. customers after claiming it had withdrawn from the U.S. market to avoid being subject to U.S. regulations; and (ii) failed to implement and maintain adequate anti-money laundering and KYC programs.1 Similarly, in 2023, the Justice Department charged the founders of Tornado Cash, a well-known cryptocurrency mixer, with money laundering and related offenses. The SEC and CFTC have also pursued several enforcement actions against exchanges and token issuers in recent years2
The Blanche Memo
The Blanche Memo declares that the DOJ “is not a digital assets regulator” and is ending “regulation by prosecution in this space.” As outlined in the Blanche Memo, the Justice Department plans to focus on digital asset investigations and prosecutions targeting “conduct victimizing investors, including embezzlement and misappropriation of customers’ funds on exchanges, digital asset investment scams, fake digital asset development projects such as rug pulls, hacking of exchanges and decentralized autonomous organizations resulting in the theft of funds, and exploiting vulnerabilities in smart contracts.” The Blanche Memo emphasizes that enhanced focus will be placed—in accordance with the “total elimination” policy described in Executive Order 14157—on cases involving cartels, transnational criminal organizations, foreign terrorist organizations, and specially designated global terrorists, which have “increasingly turned to digital assets to fund their operations and launder the proceeds of their illicit businesses.” Specifically, the Blanche Memo notes that “[a]s part of the Justice Department’s ongoing work against fentanyl trafficking, terrorism, cartels, and human trafficking and smuggling, the [DOJ] will pursue the illicit financing of these enterprises by the individuals and enterprises themselves, including when it involves digital assets, but will not pursue actions against the platforms that these enterprises utilize to conduct their illegal activities.” Indeed, the Blanche Memo notes that virtual currency exchanges, mixing and tumbling services, and offline wallet providers will not be targeted based on bad acts committed by “end users” or for “unwitting violations of regulations.”
In accordance with the above priorities, the Blanche Memo concludes by stating that “[o]ngoing investigations that are inconsistent with the foregoing should be closed.” And pursuant to the DOJ’s shift in focus, the Blanche Memo announces that “[c]onsistent with the narrowing of the enforcement policy relating to digital assets,” NCET is to be disbanded, effective immediately. Similarly, the Blanche Memo reveals that going forward, the DOJ Fraud Section’s “Market Integrity and Major Frauds Unit shall cease cryptocurrency enforcement in order to focus on other priorities, such as immigration and procurement frauds.” The Criminal Division’s Computer Crime and Intellectual Property Section (CCIPS) “will continue to provide guidance and training to Department personnel and serve as liaisons to the digital asset industry.”
With these significant policy announcements in mind, the Blanche Memo directs federal prosecutors to consider several factors when deciding whether to pursue criminal charges involving digital assets. According to the Blanche Memo, prosecutors:
1.
Should prioritize cases that “hold accountable individuals who (a) cause financial harm to digital asset investors and consumers; and/or (b) use digital assets in furtherance of other criminal conduct, such as fentanyl trafficking, terrorism, cartels, organized crime, and human trafficking and smuggling.” To this end, the Blanche Memo suggests that criminal cases premised on regulatory or compliance violations, such as those “resulting from diffuse decisions made at lower levels of digital asset companies,” may not advance DOJ priorities.
2.
Should not charge “regulatory violations in cases involving digital assets,” including “unlicensed money transmitting under 18 U.S.C. § 1960(b)(l)(A) and (B), violations of the Bank Secrecy Act, unregistered securities offering violations, unregistered broker-dealer violations, and other violations of registration requirements under the Commodity Exchange Act—unless there is evidence that the defendant knew of the licensing or registration requirement at issue and violated such a requirement willfully.”
3.
Should not charge “violations of the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Exchange Act, or the regulations promulgated pursuant to these Acts, in cases where (a) the charge would require the Justice Department to litigate whether a digital asset is a ‘security’ or ‘commodity,’ and (b) there is an adequate alternative criminal charge available, such as mail or wire fraud.”3
The Blanche Memo also discusses an issue with compensating victims in the digital asset sector. Specifically, it addresses a concern where victim losses due to fraud and theft—including in several high-profile instances where companies had gone bankrupt while maintaining custody of victim assets—have been calculated based on the asset’s value at the time the fraud occurred. This approach, the Blanche Memo says, prevents victims from benefiting from corresponding gains that occurred during or after the fraud (when the victim would have possessed the asset). Accordingly, the Blanche Memo instructs the Office of Legal Policy and the Office of Legislative Affairs to evaluate and propose legislative and regulatory reforms to address this concern and improve asset forfeiture efforts in cases involving digital assets.
The Blanche Memo concludes by affirming the DOJ’s commitment to “fully participate” in President Trump’s Working Group on Digital Asset Markets, established under Executive Order 14178. Specifically, DOJ attorneys will “identify and make recommendations regarding regulations, guidance documents, orders, or other items that affect the digital asset sector” and assist in preparing a report to President Trump, outlining regulatory and legislative proposals designed to advance the policies and priorities set forth in the aforementioned Executive Order.
Implications
As noted in the Blanche Memo, the DOJ has expressed an intent to “narrow” its prosecutorial focus as it relates to digital assets, a step that appears consistent with other recent efforts to bolster innovation and development in the cryptocurrency industry. Pursuant to this change in focus, the Blanche Memo notes that the DOJ “will no longer pursue litigation or enforcement actions that have the effect of superimposing regulatory frameworks on digital assets while President Trump’s actual regulators do this work outside the punitive criminal justice framework.” Indeed, the DOJ’s message in the Blanche Memo appears to mirror recent trends from the SEC and CFTC. Members of the digital asset community should take notice as the regulatory framework for cryptocurrencies continues to evolve.
1 In March 2025, President Trump granted full pardons to BitMEX and its co-founders, Arthur Hayes, Benjamin Delo, and Samuel Reed.
2 As just two examples, the SEC pursued enforcement actions against token issuers LBRY, Inc. and Ripple Labs, Inc. in 2022 and 2023, which are discussed in our prior GT Alerts.
3 The Blanche Memo notes that the DOJ may continue to (i) take the position that bitcoin or ether is a “commodity” under the Commodity Exchange Act, or (ii) file securities fraud charges where the “security” at issue is the equity or stock in a digital asset company.
After 12 Enforcement Actions and 9 No-Action Letters, CFTC Staff Effectively Repeals the Pre-Trade Mid-Market Mark Disclosure Requirement
The Commodity Futures Trading Commission’s (CFTC or Commission) Market Participants Division (MPD) issued Letter 25-09, which effectively eliminates the pre-trade mid-market mark (PTMMM) disclosure requirement for uncleared swaps, foreign exchange forwards and foreign exchange swaps.[1]
For the CFTC’s 106 registered swap dealers, MPD staff’s April 4 action is very welcome news. Since the PTMMM disclosure requirement was adopted in February of 2012,[2] the Commission has brought and settled 12 enforcement actions against registered swap dealers, each for their alleged failure to comply with the requirement. That averages to be almost one enforcement action per year. And following the rule’s adoption, MPD staff has issued nine separate no-action letters to provide relief (not including Letter 25-09) from the PTMMM disclosure requirement because either the rule’s stated purpose could be achieved through alternative means, or the disclosure requirement would be too difficult in practice to implement under certain circumstances.[3]
But Why Eliminate the PTMMM Disclosure Requirement?
When the CFTC adopted the PTMMM disclosure requirement back in 2012, the Commission stated that “[t]he spread between the quote in the mid-market mark is relevant to disclosures regarding material incentives and provides the counterparty with pricing information that facilitates negotiations and balances historical information asymmetry regarding swap pricing.”[4] The CFTC noted that dealers historically had an informational advantage over non-dealers. The requirement was essentially intended to resolve this informational imbalance.
Specifically, CFTC Rule 23.431(a)(3)(i) and paragraph (d)(2) together provide that, before a swap is executed, swap dealers must disclose to their non-dealer counterparties the mid-market mark of the swap, which accounts for the swap dealer’s material incentives included in the price of the swap.[5] The CFTC imposed this blanket requirement and then, over the next few years, issued a series of relief from the requirement with respect to certain types of swaps (e.g., swaps that are intended to be cleared; foreign exchange forwards and foreign exchange swaps where each currency of the transaction is one of the Bank of International Settlements 31 currencies and where the transaction has a stated maturity of one year or less). In many of the letters where MPD staff provided relief in response to letters from industry trade groups, staff noted that relief from PTMMM disclosure requirements was warranted in certain circumstances where real-time, tradeable bid and offer swap pricing information is widely available to non-dealers on CFTC registered exchanges.[6]
Following the receipt of a joint letter from three industry trade associations in early 2025, MPD staff reached a different conclusion. That is, Letter 25-09 reflects a complete “about-face” in terms of the Commission’s policy view on this particular requirement.
Specifically, Letter 25-09 expressly states that MPD staff now concludes a “reconsideration of the usefulness and effectiveness of the PTMMM disclosure requirement should be undertaken.” MPD staff found persuasive the trade associations claim that “the PTMMM [Requirement] does not provide any significant informational value to a Swap Entity’s counterparties, and the PTMMM Requirement imposes significant operational burdens on Swap Entities, and at worst, impedes the prompt execution of swap transactions.”
In the letter, MPD staff also note that the US Securities and Exchange Commission (SEC) — which has very similar rules generally to the CFTC with respect to dealers in security-based swaps — declined to adopt a similar PTMMM disclosure requirement notwithstanding the relevant Dodd-Frank Act amendments to the Exchange Act of 1934 mirroring the amendments to the Commodity Exchange Act for business conduct standards. Letter 25-09 will harmonize the two agencies’ business conduct standards for dealers.
The relief in Letter 25-09 is also consistent with Acting Chairman Caroline D. Pham’s commitment to return “back to basics.” During her tenure, the Acting Chairman Pham has focused on, among other things, providing regulatory clarity,[7] reducing regulatory obligations where those obligations do not address their intended purposes, and redirecting the Enforcement Division’s focus on cases where there is actual market abuse and customer harm.
What Does This Mean for Registered Swap Dealers?
The relief in Letter 25-09 represents a significant development for swap dealers, who tend to spend exorbitant amounts of resources to ensure compliance with the PTMMM disclosure requirement. Additionally, swap dealers are frequently asked to demonstrate compliance with PTMMM disclosure requirements as part of their annual examinations with the National Futures Association (NFA).
All of that now goes away.
Another significant development that has not received much attention is the fact that MPD staff’s adoption of Letter 25-09 will likely have a positive impact on any active investigations or enforcement actions where the alleged misconduct is related to compliance with the PTMMM disclosure requirement. Swap dealers that are in the middle of any investigations or enforcement actions should consider engaging with CFTC Division of Enforcement staff to discuss the letter’s impact on their cases.
Does the Letter’s Relief Impact Other Requirements?
The relief in Letter 25-09 will remain in force until the Commission adopts a final rule addressing the PTMMM requirement. It will be interesting to see how quickly the CFTC moves forward with adopting a rule, which officially repeals the requirement.
MPD staff make clear that the Letter’s relief will have no impact on swap dealers’ obligations to provide daily mark disclosures to their non-dealer counterparties pursuant to CFTC Rule 23.431(d). The Letter also provides that it will have no impact on swap reporting requirements under Parts 43 and 45 of the Commission’s regulations.
[1] See CFTC Staff Letter 25-09 (Apr. 4, 2025), available at https://www.cftc.gov/csl/25-09/download.
[2] See Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 Fed. Reg. 9734 (Feb. 17, 2012).
[3] Note that MPD was previously named the Division of Swap Dealer and Intermediary Oversight (DSIO). Most of the no-action letters were issued by staff in DSIO.
[4] Id. at 9766.
[5] See CFTC Rule 23.431(d)(2), which provides that “the mid-market mark of the swap shall not include amounts for profit, credit reserve, hedging, funding, liquidity, or any other costs or adjustments.”
[6] See CFTC Staff Letter 12-58 (Dec. 18, 2012). Letter 12-58 also requires the non-dealer counterparty to agree in advance that the swap dealer need not disclose the PTMMM.
[7] See CFTC Staff Letter 25-10 (Apr. 9, 2025) (Advisory that provides clarity regarding CFTC staff’s view on whether certain foreign exchange instruments are swaps, foreign exchange forwards or foreign exchange swaps).