Nvidia

SEC Identifies Nvidia for Alleged Disclosure Inadequacies in its Cryptocurrency Mining Business | Dechert LLP

SEC Identifies Nvidia for Alleged Disclosure Inadequacies in its Cryptocurrency Mining Business |  Dechert LLP

Key points to remember

  • The United States Securities and Exchange Commission announced a settlement against chipmaker Nvidia Corporation on May 6, 2022, for inadequate disclosures regarding the impact of cryptocurrency mining on gaming activities. the company.
  • The SEC fined Nvidia $5.5 million, alleging that in consecutive quarters of fiscal 2018, Nvidia failed to disclose that cryptocurrency mining was a “significant item” revenue growth from sales of chips designed for gaming. The SEC alleged that Nvidia knew the surge in sales was, in large part, due to cryptocurrency mining.
  • The SEC focused on the potential harm caused to investors by the company’s alleged decision not to disclose information that would have clearly indicated that cryptocurrency mining was driving increased gaming revenue.
  • Nvidia’s settlement should serve as a warning to public companies that regulators are focusing heavily on disclosures related to cryptocurrency markets. Reporting companies whose business activities are affected by cryptocurrency markets or who engage in practices that help increase the availability of cryptocurrency, such as cryptocurrency mining, performance and staking, must ensure that they properly identify and disclose all material risks and impacts on their operations.

Introduction

The recent boom in cryptocurrency markets has matched increased demand for semiconductors as cryptocurrency mining – the process of earning cryptocurrency rewards in exchange for verifying transactions on ledgers distributed – requires significant computing power. Nvidia Corporation designs and markets Graphics Processing Units (“GPUs”) for use in games, but these GPUs may also be used to provide the computations necessary for mining on certain cryptocurrency networks. Nvidia is one of the two major GPU manufacturers whose products are commonly used for cryptocurrency mining.

In a cease and desist order dated May 6, 2022, the Securities and Exchange Commission announced that Nvidia would pay US$5.5 million to settle charges that it illegally concealed the amount of its sales dependent on minors. of cryptocurrency. Nvidia neither admitted nor denied the allegations.

The SEC claims

The allegations stem from Nvidia’s disclosures over two consecutive quarters of fiscal 2018, a period in which Nvidia’s GPUs became increasingly popular for mining cryptocurrencies such as Ether and Bitcoin. Zcash. As demand for cryptocurrencies grew in 2017, Nvidia customers increasingly used gaming GPUs for cryptocurrency mining. Nvidia then launched a product line of GPUs specifically for cryptocurrency mining, known as “CMP,” and marketed them to large mining operations.

This increased demand for Nvidia’s gaming GPUs contributed to a significant increase in Nvidia’s revenue in fiscal year 2018. Nvidia’s gaming revenue – this is how it reports its GPU sales – increased 52% year-over-year for the second quarter of fiscal 2018, and 25% year-on-year for the third quarter of fiscal 2018.

According to the SEC, during this period, Nvidia “had information indicating that cryptocurrency mining was a significant factor in the company’s year-over-year GPU revenue growth for [g]aming in its GPU business segment during the relevant period. Additionally, Nvidia analysts and investors have regularly asked senior management about the extent to which cryptocurrency mining has led to increased gaming revenue.

However, according to the SEC, the company did not sufficiently disclose the role of cryptocurrency mining in its gaming revenue figures for those quarters. This in turn would have given the misleading impression that these numbers reflected reliable future growth, when in fact they were supposed to be driven by demand from the volatile cryptocurrency market. According to the SEC, these omissions “deprived investors of information critical to evaluating the company’s business in a key market.”

Nvidia did disclose how cryptocurrency mining affected other segments of its business. The company identified cryptocurrency mining as a massive component of OEM GPU sales in GPU reportable segment revenue in its quarterly reports, which the SEC said gave the impression that the activity of the company’s game was not significantly affected by cryptocurrency mining.

The Nvidia investigation was conducted by an SEC unit responsible for protecting investors in the cryptocurrency markets and against cyber threats, which recently nearly doubled in size.1

As the Nvidia regulations show, reporting companies whose products, services or business activities are impacted by the cryptocurrency markets must ensure that they properly identify and disclose all material risks and impacts to their operations in their applicable SEC documents.

Related SEC Guidelines

The SEC has consistently expressed the view that cryptocurrency agreements pose significant legal, technological, and regulatory risks, which regulators believe can have a significant impact on an entity’s operations and financial condition. For example, at the end of March 2022,2 the SEC has issued guidance stating that there are “significant” technological, legal and regulatory risks associated with protecting cryptocurrency and, therefore, cryptocurrency should be reflected as a liability on corporate balance sheets .

The SEC guidelines and Nvidia’s enforcement actions indicate that the SEC pays close attention to disclosures regarding the risks associated with cryptocurrency, especially as cryptocurrency becomes more widely held. The Nvidia case is an important example of how cryptocurrencies are affecting the operations of a growing number of companies, and of the new risks that reporting companies must take into account when analyzing their activities and their disclosure obligations.

Footnotes

1. https://www.sec.gov/news/press-release/2022-78

2. https://www.Reuters.com/business/finance/us-sec-says-crypto-safekeeping-arrangements-should-be-treatment-liability-2022-03-31