May 10, 2022

SEC Enforcement Broadens Its Crypto Focus

On May 6, 2022, the U.S. Securities and Exchange Commission announced that it settled charges against NVIDIA Corporation alleging that the company’s disclosures regarding the impacts of increased use of its gaming products by cryptocurrency miners were inadequate and misleading. Without admitting or denying the SEC’s findings, NVIDIA agreed to a cease-and-desist order (the “Order”), and agreed to pay a $5.5 million penalty. The Order and related press release provide valuable insight into how an issuer’s disclosure obligations may be affected by its ties to cryptocurrency, regardless of whether such ties are intentional or direct. The Order also serves as an example of the SEC’s continued focus on cryptocurrency issues, coming just days after the SEC announced that 20 new positions will be added to its Crypto Assets and Cyber Unit, nearly doubling its size.

The Order states that, as the prices of certain crypto assets were on the rise in 2017, NVIDIA’s graphics processing units (“GPUs”), which are designed and marketed for gaming, were increasingly put to use mining ether and other crypto assets. At the time, analysts and investors were interested in understanding whether the company’s gaming revenues were impacted by cryptomining. Seeking to assess the sustainability of the increased revenues in light of the volatility of certain crypto asset prices, analysts and investors regularly asked senior management about the extent to which increases in gaming revenues were driven by cryptomining.

According to the Order, NVIDIA’s internal documents reflect that it was aware that its gaming sales were being positively impacted by the increase in cryptomining. Some of NVIDIA’s sales personnel had expressed their belief that much of the increased demand for the company’s gaming products was being driven by cryptomining. Although the company lacked visibility into whether any particular gaming GPU was purchased for cryptomining, NVIDIA created internal estimates indicating that cryptomining was a significant factor in the company’s year-over-year growth in the gaming segment throughout 2017. Despite this growth, the company’s SEC filings did not identify cryptomining as a significant factor in year-over-year growth in gaming revenue until February 28, 2018, when announcing its fiscal year-end results. 

The Order finds that NVIDIA should have disclosed information about the impact of cryptomining on gaming sales sooner, in two of the company’s Forms 10-Qs in 2017, as part of management’s discussion and analysis of financial condition and results of operations (“MD&A”) (Item 303 of Regulation S-K). According to the SEC’s press release announcing the Order (the “Press Release”), investors were entitled to receive information regarding “significant earnings and cash flow fluctuations related to a volatile business” so that they could “ascertain the likelihood that past performance was indicative of future performance.” 

The Press Release states that the alleged omissions misled investors because NVIDIA affirmatively discussed how other parts of the company’s business were positively impacted by demand for crypto, creating the false impression that its gaming business was not significantly affected by cryptomining. 

The SEC’s claims were based on violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, which provide liability for misstatements to investors, as well as Section 13(a) of the Exchange Act and Rule 13a-13 thereunder, which require reporting companies to file complete and accurate quarterly reports. The Order also includes an allegation that NVIDIA failed to maintain adequate disclosure controls and procedures in violation of Exchange Act Rule 13a-15(a). It is notable that the SEC pursued its omission theory under Section 17(a) in addition to Section 13(a), as Section 17(a) requires the issuer to “to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading,” or to engage in conduct “which operates or would operate as a fraud or deceit upon the purchaser.” However, the Order notes that violation of these provisions does not require scienter and may rest on a finding of negligence. 

The Order is an important example of the ways in which cryptocurrencies are affecting non-crypto companies, and the new risks that public companies must consider when analyzing their business and disclosure obligations. Crypto-adjacent businesses may be impacted by the volatile nature of crypto asset prices, and management should consider how that may impact revenues, risk factors, and other essential disclosure issues. In particular, companies need to carefully consider whether additional disclosures are required when they invest in digital assets as part of their capital management plans, accept payment in digital assets, or become involved in products or services that support crypto-related activities such as investing, mining, staking, or DeFi. While it may be difficult, or even impossible in some cases, to determine the precise degree to which an issuer’s business is affected by demand for crypto assets, the SEC contends that investors are entitled to the issuer’s best estimates.