Best Practice Newsletter – Sept 2023

New ESG Rules Delayed by Public Comment Letters–

The SEC is delaying final ruling on wide sweeping Environmental, Social and Governance (ESG) Rules because of enormous public comments about Scope 3 disclosure requirements, said Chairman Gary Gensler, during a September 12 appearance before the US Senate Committee on Banking, Housing and Foreign Affairs.

The SEC has received more than 16,000 comment letters on Scope 3 carbon emission disclosures, which would require companies to report carbon emissions across their supply chain, whether domestic or international.

“We got a lot of comments around what’s called Scope 3 disclosures, and that’s what we’re trying to move forward on,” said Gensler, who declined to estimate when the SEC will adopt final climate risk disclosure rules, originally proposed in March 2022.

The proposed rules would require SEC registrants to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.

FASB Approves New Crypto Asset Standards 

The Financial Accounting Standards Board (FASB) has approved new standards that regulate how cryptocurrencies, such as bitcoin, are disclosed and measured. Approved this September, the new standards do not include nonfungible tokens (NFTs), as was originally proposed.

FASB is requiring that crytpo assets be accounted for using fair value measurement, with any changes to be recognized in net income in each reporting period as follows:

1. At both annual and interim periods, the name of the crypto asset, fair value, units held, and cost basis.

2. At both annual and interim periods, the fair value and cost basis of other crypto asset holdings, which may be aggregated into a single line item.

3. Annually, a reconciliation of activity between the beginning and end of the period for total crypto asset holdings. This disclosure would require that an entity disaggregate information by additions, dispositions, gains, and losses during the period and include a description of the additions and dispositions.

4. Annually, for disposition of crypto assets during the period, the difference between the sale price and the cost basis of those assets.

5. At both interim and annual periods, the fair value of the crypto assets that are restricted from sale.

In addition to excluding NFTs, the new standards do not include wrapped tokens, which derive their value from other assets (such as gold, stocks, shares, real estate) or governance tokens, which give someone a right to influence to protocol, similar to voting stock.

IRS will use AI to Target Millionaires, Businesses

The Internal Revenue Services will begin using money from last year’s Inflation Reduction Act to fund artificial intelligence and other technology that will target both millionaires and businesses who owe back taxes.

In its September 8 press release, the IRS said it will focus on 1,600 individual taxpayers earning more than $1 million annually and who owe more than $250,000, as well as large businesses partnerships with more than $10 billion in assets that owe the government large amounts of money. The IRS also said that it won’t increase its audit rates for those earning less than $400,000 per year.

The agency said that the focus on individual high-income earners is “Building off earlier successes that collected $38 million from more than 175 high-income earners,” and added that the IRS “will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024.”

Regarding it targeting of large partnerships, the IRS said “By the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.”

The IRS said it won’t stop at the 75, noting that “the IRS will soon have the resources and plan in place to ramp up this effort. It will begin in early October when the IRS will start mailing around 500 partnerships. Depending on the response, the IRS will add these to the audit stream for additional work.”

The Inflation Reduction Act, signed by President Biden in August 2022, allocated nearly $80 billion in funding to the IRS over a 10-year period to enhance taxpayer service, technology and enforcement efforts.

Hollywood Again in SEC Crosshairs over NFTs

The creator of animated web series “Stoner Cats” has been charged by the SEC with “conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs), and was ordered to pay $1 million in civil penalties.

The animated series was produced in part by actor Mila Kunis and voiced in part by Ashton Kutcher, Chris Rock and other Hollywood celebs.

In fining the producer Stoner Cats 2 LLC (SC2), the SEC said that SC2 sold to investors more than 10,000 NFTs for approximately $800 each, selling out in 35 minutes.

The order finds that both before and after SC2 NFTs were sold to the public, SC2’s marketing campaign highlighted specific benefits of owning them, including the option for owners to resell their NFTs on the secondary market. In addition, as part of the marketing campaign, the SC2 team emphasized its expertise as Hollywood producers, its knowledge of crypto projects, and the well-known actors involved in the web series, leading investors to expect profits because a successful web series could cause the resale value of the SC2 NFTs in the secondary market to rise.

As a result, the SEC order “finds that SC2 configured the Stoner Cats NFTs to provide SC2 a 2.5 percent royalty for each secondary market transaction in the NFTs and it encouraged individuals to buy and sell the NFTs, leading purchasers to spend more than $20 million in at least 10,000 transactions.”

According to the SEC’s order, “SC2 violated the Securities Act of 1933 by offering and selling these crypto asset securities to the public in an unregistered offering that was not exempt from registration.

Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order, in addition to paying the $1 million fine. The order establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs. SC2 also agreed to destroy all NFTs in its possession or control and publish notice of the order on its website and social media channels.