Transformed into a "crypto treasury" and stock price soared, the US SEC begins investigating "pre-positioned" funds

In some cases, the confidentiality of treasury companies appears to have been compromised, resulting in significant stock price increases days before official announcements, exposing issues of information leakage.

Written by: Bao Yilong

Source: Wallstreetcn

Many companies, when implementing cryptocurrency treasury strategies, need to contact external investors to assess their interest in purchasing tokens through private financing. To maintain confidentiality, investors are required to sign non-disclosure agreements until the company officially announces its new strategy. However, according to informed sources, in some cases, confidentiality appears to have been breached, resulting in significant stock price increases days before the official announcement, exposing information leakage issues.

U.S. financial regulators are investigating abnormal trading patterns in more than 200 companies that have announced the adoption of cryptocurrency treasury strategies, where stock prices surged significantly before the announcement of plans to purchase bitcoin and other digital assets.

According to media reports on September 25, the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra) have contacted some companies whose stock prices fluctuated abnormally after announcing the purchase of bitcoin and other digital assets as part of their core business strategy.

In conversations and correspondence with relevant companies, regulators have specifically emphasized concerns about potential violations of fair disclosure regulations. These regulations require listed companies to treat all market participants equally when disclosing material information and prohibit selective disclosure of insider information that could be used for trading.

This regulatory scrutiny has introduced new uncertainties for companies following the so-called "cryptocurrency treasury" strategy. Former SEC enforcement attorney David Chase stated:

When these letters are sent out, they do stir up the market. This is usually the first step in an investigation. As for whether a full-scale investigation will follow, that remains to be seen.

The Rise of Cryptocurrency Treasury Strategies

Cryptocurrency treasury companies have emerged in large numbers over the past few months, following the model pioneered by Strategy.

The core of this strategy is to raise funds through stock and bond sales to purchase bitcoin and other digital tokens.

According to data from cryptocurrency consulting firm Architect Partners, so far this year, 212 new companies have announced plans to raise about $102.0 billions to purchase cryptocurrencies.

For many companies, shifting to a cryptocurrency treasury strategy typically requires contacting a group of external investors to assess their interest in purchasing tokens through private financing.

However, in this process, investors are required to sign non-disclosure agreements to maintain the confidentiality of the company's identity until the company announces its new strategy.

Risks Arising from Breached Non-Disclosure Agreements

According to informed sources cited in the report, in some cases, this confidentiality appears to have been breached, with some stocks surging significantly days before the announcement.

Lawyers involved in cryptocurrency treasury transactions pointed out that information leakage not only raises suspicions of insider trading but may actually harm transaction pricing.

Justin Platt, a partner at law firm Goodwin, stated:

If the stock price fluctuates significantly in the days leading up to transaction pricing, it can actually make it very difficult to reach a transaction price and expose the deal to execution risk.

It is worth noting that Paul Atkins, chairman of the U.S. Securities and Exchange Commission, recently criticized regulators' past practice of "weaponizing" their enforcement powers to stifle the crypto industry in a recent speech, and stated that the agency will now provide the industry with "clear and predictable rules."

This may suggest that the current investigation is also part of regulators' efforts to establish clear market rules for this emerging field.