SEC Company Response from Riot Platforms, Inc. (RIOT) (CIK 0001167419) (RIOT) — Jun 29, 2018
Riot Platforms, Inc. (RIOT) (CIK 0001167419)
Date: June 29, 2018 · CIK: 0001167419 · Accession: 0001079973-18-000409
AI Filing Summary & Sentiment
File numbers found in text: 001-33675
Referenced dates: April 24, 2018, June 15, 2018
Letter
Re:
Correspondence
June 29, 2018
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, DC 20549
Attention: Suzanne Hayes
Riot Blockchain, Inc.
Current Report on Form 8-K filed October 4, 2017
Response dated March 26, 2018
Form 10-K for the Fiscal Year Ended December 31, 2017
Form 10-K/A for the Fiscal Year Ended December 31, 2017
Form 10-Q for the Quarterly Period Ended March 31, 2018
File No. 001-33675
Ladies and Gentlemen:
On behalf of Riot Blockchain, Inc. (the “Company”), please accept this letter as the Company’s response to the comments of the Staff of the Securities and Exchange Commission (the “Staff”) in connection with the above referenced filings as set forth in the Staff’s comment letter dated June 15, 2018.
SEC Comment
Current Report on Form 8-K filed October 4, 2017
Response dated April 24, 2018
General
1.
We note your response to comment 3 in your letter dated April 24, 2018. We are not issuing further comments related to your analysis of the section 3(b)(1) exemption at this time. Our decision not to issue additional comments should not be interpreted to mean that we agree with your analysis.
Response:
The Company notes the staff’s response.
1185 Avenue of the Americas | 37th Floor | New York, NY | 10036
T (212) 930 9700 | F (212) 930 9725 | www.srfkllp.com
2.
We note your assertion that your digital assets meet the definition of intangible assets, which suggests they are subject to ASC 350-30. We are unable to identify a scope exception in ASC 350-30 that permits accounting for intangible assets at fair value each reporting period. If your digital assets are within the scope of ASC 350-30, please revise your accounting to comply with those requirements
Response:
While digital assets may meet the definition of an intangible asset in ASC 350-30, paragraph 15-3 states that only the following transactions are within its scope:
a.
Intangible assets acquired individually or with a group of other assets (but not the recognition and initial measurement of those acquired in a business combination or an acquisition by a not-for-profit entity)
b.
Intangible assets (other than goodwill) that an entity recognizes in accordance with Subtopic 805-20 or 958-805 after they have been initially recognized and measured, except for those identified in the following paragraph
c.
Costs of internally developing identifiable intangible assets that an entity recognizes as assets
The Company notes that it is receiving consideration in exchange for providing verification services (a revenue transaction) rather than acquiring an intangible asset either individually, as a group, or part of a business combination. Therefore, the Company concluded that the revenue transaction is not within the scope of the transactions listed in ASC 350-30-15-3(a) and (b).
Under ASC 350-30-25-3, the costs of internally developing intangible assets are recognized as an expense when incurred. PwC’s Point of View, Cryptocurrencies Time to Consider Plan B (March 2018), provides the following further guidance that might apply to the recognition of intangible assets for miners:
When cryptocurrency is purchased, the intangible asset would be measured at the price paid or consideration given to obtain the cryptocurrency. However, the question for miners is more complicated. Unlike a direct purchase, miners are awarded units, but they incur costs of computing equipment, electricity, and other expenses. At issue for the miners is whether the associated costs should be capitalized as an intangible asset or expensed.
There is not a lot of guidance on accounting for the costs incurred to internally-develop intangible assets, but it generally limits capitalization. Notwithstanding, existing guidance may not preclude capitalization for certain costs incurred by miners to obtain cryptocurrencies. Miners may need to analogize to other areas of US GAAP where explicit guidance exists (e.g., internal-use software or film production).
For miners of digital assets, this would result in capitalizing the costs of the computing equipment, electricity, and other expenses incurred in performing the verification service as intangible assets. This would result in significant discrepancies in amounts recognized as intangible assets between a mining company and a company which purchases an equal amount of the digital currency on an exchange.
A further issue created by classifying digital currencies as an intangible asset is the impairment model associated with the subsequent accounting for intangible assets. Presumably, a digital asset would be subject to amortization, in which case it would be subject to impairment if it is subsequently determined to have a finite useful life. Because the prices of many cryptocurrencies are extremely volatile, there are practical challenges with making judgments associated with when the intangible assets are “more likely than not” to be impaired.
While digital assets meet the technical definition of intangible assets in ASC 350-30, that definition was developed based on guidance that was issued more than 40 years ago in APB Opinion No. 17, Intangible Assets, which did not contemplate the nature of digital currencies. Rather, the guidance focuses on intangible assets like trademarks, patents, and customer relationships that are typically held for long periods of time and do not have quoted prices in active markets.
Due to the issues noted above, the Company concluded that the digital currency received in exchange for performing a verification service is not within the scope of the three transactions listed in ASC 350-30 and that it would not be appropriate to analogize to the guidance in ASC 350-30 for the subsequent measurement of digital assets. Rather, the Company concluded that it is more appropriate to analogize to the guidance in ASC 825 on accounting for financial instruments in order to subsequently measure the digital assets that it receives in exchange for providing verification services.
To the extent the staff concludes further disclosure of the above is necessary, such information will be included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 and thereafter.
Form 10-K for the Fiscal Year Ended December 31, 2017
Item 1. Business, page 3
3.
We refer to your statement in the penultimate paragraph on page 4 that you participate in mining pools. Please expand your discussion to disclose any pool fee that you are required to pay.
Response:
The following additional language will be added by amendment:
A mining pool is the pooling of resources by miners, who share their processing power over a network and split rewards according to the amount of work they contributed to the probability of finding a block. Mining pools emerged in response to the growing difficulty and available hashing power that competes to discover blocks on the Bitcoin blockchain. Riot participates in mining pools.
The mining pool operator provides a service that coordinates the workers. Fees are paid to the mining pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members’ hashing power, identifies new block rewards, records how much work all the participants are doing, and assigns block rewards in-proportion to the participants’ efforts. While we do not pay pool fees directly, pool fees are deducted from amounts we may otherwise earn.fees (and payouts) fluctuate and historically have been approximately 2% on average.
Mining pools are subject to various risks such as disruption and down time. Riot has software that monitors its pool performance and reward rates to monitor credits for our contributed hashing power. In the event that a pool experiences down time or not yielding returns, our results may be impacted.
4.
We note your risk factor disclosures regarding the potential adverse effects that could occur to your business in case you suffer a loss of cryptocurrency as a result of hackers and other cybersecurity threats. Expand your disclosure to describe your custodial practices for digital assets.
Response:
The following additional language will be added by amendment:
Risks Due to Hacking or Adverse Software Event
In order to minimize risk, Riot has established processes to manage wallets that are associated with our cryptocurrency holdings. There can be no assurances that any processes we have adopted or will adopt in the future are or will be secure or effective, and we would suffer significant and immediate adverse effects if we suffered a loss of our cryptocurrency due to an adverse software or cybersecurity event. Riot utilizes several layers of threat reduction techniques, including: (i) the use of hardware wallets to store sensitive private key information; (ii) performance of transactions offline; and (iii) offline generation and use of private keys.
At present, the Company is evaluating several third-party custodial wallet alternatives, but there can be no assurance Riot will utilize such services, as other new options may develop in the future, and if a custodial wallet is used there can be no assurance that such services will be more secure than those the Company presently employs.
5.
You state in the fourth paragraph on page 4 that you are building a cryptocurrency mining operation for "primarily Bitcoin." You also state on page 5 that you believe Logical Brokerage will allow you to investigate the establishment of a digital currency exchange, and that in addition to Bitcoin, the exchange would provide services for other "digital currencies," such as Ethereum and Litecoin. We also note that an investor presentation you have furnished with your March 14, 2018 Form 8-K references USD Minute-Tokens in connection with your TessPay business. Please disclose the types of cryptocurrencies that you are mining or expect to mine other than Bitcoin, or for which you expect Logical Brokerage or other subsidiaries will provide services, describe the nature and characteristics of each of these assets, and provide a detailed analysis explaining why you believe these other cryptocurrencies are not securities as defined in Section 2(a)(1) of the Securities Act.
Response:
On June 6, 2018 SEC Chairman Jay Clayton stated in a press interview that “Bitcoin” is not a security. This statement was closely followed by William Hinman, Director of the Division of Corporation Finance, who issued a statement on June 14, 2018 that “Ethereum” is also not a security. In light of similarities, we believe that the SEC will evaluate Bitcoin Cash and Litecoin and may similarly conclude these cryptocurrencies are not securities. At the present time, Logical Brokerage is in the planning stage, and its plan of operation is not complete as it pursues regulatory authorization to perform exchange-type functions for digital assets. However, the Company will initially consider serving as an exchange for Bitcoin and Ethereum which as noted, the SEC has stated do not meet the United States Supreme Court Howey-test definition of security at this time. If the SEC takes a similar position the Company will consider evaluating the inclusion of Bitcoin Cash and Litecoin. Any future activities will necessarily be evaluated on a case by case basis as criteria are developed to evaluate digital assets seeking to utilize the platform and client certification processes.
The Company only mines Bitcoin, Bitcoin Cash, and Litecoin, which may be considered for RiotX and our TessPay’s proposed tokens are not presently being considered and do not presently exist while TessPay is developing its business. At the present time the inclusion of additional digital assets have not been addressed by the Company and when addressed will be the subject of review which would include evaluating whether additional digital assets that seek to be registered for sale on the exchange would be permitted, whether activities will require further licensing or regulation by Logical Brokerage, and future interpretations by regulators in order to comply with applicable rules and regulation in effect from time to time.
Competition, page 5
6.
Please revise this section to also discuss the competition in the field of digital currency exchanges applicable to Logical Brokerage's business.
Response:
The following additional language will be added by amendment:
We believe there are several companies operating digital currency exchange operations in the United States that will be competitors to Logical Brokerage and more potential competitors are expected to emerge. Little information is known about these companies inasmuch as they are privately owned and reliable information about their size and operations is not known. The current known competitors include:
Ø
Gemini
Ø
Coinbase
Ø
Itbit
Ø
Kraken
Ø
Poloniex / Circle
Ø
Bittrex
Ø
Bitstamp
Ø
Binance
Ø
Houbi
7.
Please revise your statement that Overstock.com Inc. is one of your competitors to distinguish the activities of its subsidiary, Medici Ventures, from the activities of its retail business and to clarify that Medici Ventures may be considered one of your competitors.
Response:
The following additional information will be added by amendment:
Of the competitors, we believe Overstock is among the best known as an e-retailer, Overstock has been investing in blockchain and cryptocurrency startups for several years through Medici Ventures, its wholly-owned subsidiary according to public reports by Overstock. Medici has more than a dozen portfolio companies, including tZero. T Zero is a wholly-owned subsidiary of Overstock.com that focuses on the development and commercialization of financial technology (“fintech”) with blockchain technology. In doing so, tZero hopes to bring greater efficiency and transparency to capital markets. On April 8, 2018 tZero, the blockchain subsidiary of Overstock.com, announced the release of a demo version of the prototype of its security token trading software which demonstrates how security tokens may be traded on the platform. tZero’s trading platform has been developed to compete with traditional stock exchanges by integrating cryptographically-secured distributed ledgers with existing market processes to reduce settlement time and costs, and increase transparency and efficiency. tZero has not set a launch date.
Government Regulation, page 6
8.
Please expand your disclosure to discuss the effect of existing or probable governmental regulations on your Logical Brokerage business, including financial services and consumer protection laws, and any regulations relating to required state money transmitter licenses. Please also discuss whether the operations of Logical Brokerage will trigger any obligations under the Securities Act or Securities Exchange Act, including any requirements to register as a national securities exchange, alternative trading system or broker-dealer, or any obligations to register with the CFTC as a futures exchange. Refer to Items 101(h)(4)(viii) and (ix) of Regulation S-K.
Response:
The following additional information will be added by amendment:
Exchanges for securities must be registered as a national securities exchange or must be exempt from such registration requirement (e.g., registered broker-dealers operating as alternative trading systems). As a result, we do not currently intend for our planned cryptocurrency exchange operations through our Logical Brokerage subsidiary to allow trading in cryptocurrencies (including cryptocurrencies issued in ICOs) that may be classified as securities. Rather, we anticipate that such operations would, at least initially, facilitate the exchange of digital currencies like Bitcoin, Ethereum, and potentially Litecoin and Bitcoin Cash. Consistent with recent statements of SEC senior staff
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CORRESP 1 filename1.htm Correspondence June 29, 2018 United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, DC 20549 Attention: Suzanne Hayes Re: Riot Blockchain, Inc. Current Report on Form 8-K filed October 4, 2017 Response dated March 26, 2018 Form 10-K for the Fiscal Year Ended December 31, 2017 Form 10-K/A for the Fiscal Year Ended December 31, 2017 Form 10-Q for the Quarterly Period Ended March 31, 2018 File No. 001-33675 Ladies and Gentlemen: On behalf of Riot Blockchain, Inc. (the “Company”), please accept this letter as the Company’s response to the comments of the Staff of the Securities and Exchange Commission (the “Staff”) in connection with the above referenced filings as set forth in the Staff’s comment letter dated June 15, 2018. SEC Comment Current Report on Form 8-K filed October 4, 2017 Response dated April 24, 2018 General 1. We note your response to comment 3 in your letter dated April 24, 2018. We are not issuing further comments related to your analysis of the section 3(b)(1) exemption at this time. Our decision not to issue additional comments should not be interpreted to mean that we agree with your analysis. Response: The Company notes the staff’s response. 1185 Avenue of the Americas | 37th Floor | New York, NY | 10036 T (212) 930 9700 | F (212) 930 9725 | www.srfkllp.com 2. We note your assertion that your digital assets meet the definition of intangible assets, which suggests they are subject to ASC 350-30. We are unable to identify a scope exception in ASC 350-30 that permits accounting for intangible assets at fair value each reporting period. If your digital assets are within the scope of ASC 350-30, please revise your accounting to comply with those requirements Response: While digital assets may meet the definition of an intangible asset in ASC 350-30, paragraph 15-3 states that only the following transactions are within its scope: a. Intangible assets acquired individually or with a group of other assets (but not the recognition and initial measurement of those acquired in a business combination or an acquisition by a not-for-profit entity) b. Intangible assets (other than goodwill) that an entity recognizes in accordance with Subtopic 805-20 or 958-805 after they have been initially recognized and measured, except for those identified in the following paragraph c. Costs of internally developing identifiable intangible assets that an entity recognizes as assets The Company notes that it is receiving consideration in exchange for providing verification services (a revenue transaction) rather than acquiring an intangible asset either individually, as a group, or part of a business combination. Therefore, the Company concluded that the revenue transaction is not within the scope of the transactions listed in ASC 350-30-15-3(a) and (b). Under ASC 350-30-25-3, the costs of internally developing intangible assets are recognized as an expense when incurred. PwC’s Point of View, Cryptocurrencies Time to Consider Plan B (March 2018), provides the following further guidance that might apply to the recognition of intangible assets for miners: When cryptocurrency is purchased, the intangible asset would be measured at the price paid or consideration given to obtain the cryptocurrency. However, the question for miners is more complicated. Unlike a direct purchase, miners are awarded units, but they incur costs of computing equipment, electricity, and other expenses. At issue for the miners is whether the associated costs should be capitalized as an intangible asset or expensed. There is not a lot of guidance on accounting for the costs incurred to internally-develop intangible assets, but it generally limits capitalization. Notwithstanding, existing guidance may not preclude capitalization for certain costs incurred by miners to obtain cryptocurrencies. Miners may need to analogize to other areas of US GAAP where explicit guidance exists (e.g., internal-use software or film production). For miners of digital assets, this would result in capitalizing the costs of the computing equipment, electricity, and other expenses incurred in performing the verification service as intangible assets. This would result in significant discrepancies in amounts recognized as intangible assets between a mining company and a company which purchases an equal amount of the digital currency on an exchange. A further issue created by classifying digital currencies as an intangible asset is the impairment model associated with the subsequent accounting for intangible assets. Presumably, a digital asset would be subject to amortization, in which case it would be subject to impairment if it is subsequently determined to have a finite useful life. Because the prices of many cryptocurrencies are extremely volatile, there are practical challenges with making judgments associated with when the intangible assets are “more likely than not” to be impaired. While digital assets meet the technical definition of intangible assets in ASC 350-30, that definition was developed based on guidance that was issued more than 40 years ago in APB Opinion No. 17, Intangible Assets, which did not contemplate the nature of digital currencies. Rather, the guidance focuses on intangible assets like trademarks, patents, and customer relationships that are typically held for long periods of time and do not have quoted prices in active markets. Due to the issues noted above, the Company concluded that the digital currency received in exchange for performing a verification service is not within the scope of the three transactions listed in ASC 350-30 and that it would not be appropriate to analogize to the guidance in ASC 350-30 for the subsequent measurement of digital assets. Rather, the Company concluded that it is more appropriate to analogize to the guidance in ASC 825 on accounting for financial instruments in order to subsequently measure the digital assets that it receives in exchange for providing verification services. To the extent the staff concludes further disclosure of the above is necessary, such information will be included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 and thereafter. Form 10-K for the Fiscal Year Ended December 31, 2017 Item 1. Business, page 3 3. We refer to your statement in the penultimate paragraph on page 4 that you participate in mining pools. Please expand your discussion to disclose any pool fee that you are required to pay. Response: The following additional language will be added by amendment: A mining pool is the pooling of resources by miners, who share their processing power over a network and split rewards according to the amount of work they contributed to the probability of finding a block. Mining pools emerged in response to the growing difficulty and available hashing power that competes to discover blocks on the Bitcoin blockchain. Riot participates in mining pools. The mining pool operator provides a service that coordinates the workers. Fees are paid to the mining pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members’ hashing power, identifies new block rewards, records how much work all the participants are doing, and assigns block rewards in-proportion to the participants’ efforts. While we do not pay pool fees directly, pool fees are deducted from amounts we may otherwise earn.fees (and payouts) fluctuate and historically have been approximately 2% on average. Mining pools are subject to various risks such as disruption and down time. Riot has software that monitors its pool performance and reward rates to monitor credits for our contributed hashing power. In the event that a pool experiences down time or not yielding returns, our results may be impacted. 4. We note your risk factor disclosures regarding the potential adverse effects that could occur to your business in case you suffer a loss of cryptocurrency as a result of hackers and other cybersecurity threats. Expand your disclosure to describe your custodial practices for digital assets. Response: The following additional language will be added by amendment: Risks Due to Hacking or Adverse Software Event In order to minimize risk, Riot has established processes to manage wallets that are associated with our cryptocurrency holdings. There can be no assurances that any processes we have adopted or will adopt in the future are or will be secure or effective, and we would suffer significant and immediate adverse effects if we suffered a loss of our cryptocurrency due to an adverse software or cybersecurity event. Riot utilizes several layers of threat reduction techniques, including: (i) the use of hardware wallets to store sensitive private key information; (ii) performance of transactions offline; and (iii) offline generation and use of private keys. At present, the Company is evaluating several third-party custodial wallet alternatives, but there can be no assurance Riot will utilize such services, as other new options may develop in the future, and if a custodial wallet is used there can be no assurance that such services will be more secure than those the Company presently employs. 5. You state in the fourth paragraph on page 4 that you are building a cryptocurrency mining operation for "primarily Bitcoin." You also state on page 5 that you believe Logical Brokerage will allow you to investigate the establishment of a digital currency exchange, and that in addition to Bitcoin, the exchange would provide services for other "digital currencies," such as Ethereum and Litecoin. We also note that an investor presentation you have furnished with your March 14, 2018 Form 8-K references USD Minute-Tokens in connection with your TessPay business. Please disclose the types of cryptocurrencies that you are mining or expect to mine other than Bitcoin, or for which you expect Logical Brokerage or other subsidiaries will provide services, describe the nature and characteristics of each of these assets, and provide a detailed analysis explaining why you believe these other cryptocurrencies are not securities as defined in Section 2(a)(1) of the Securities Act. Response: On June 6, 2018 SEC Chairman Jay Clayton stated in a press interview that “Bitcoin” is not a security. This statement was closely followed by William Hinman, Director of the Division of Corporation Finance, who issued a statement on June 14, 2018 that “Ethereum” is also not a security. In light of similarities, we believe that the SEC will evaluate Bitcoin Cash and Litecoin and may similarly conclude these cryptocurrencies are not securities. At the present time, Logical Brokerage is in the planning stage, and its plan of operation is not complete as it pursues regulatory authorization to perform exchange-type functions for digital assets. However, the Company will initially consider serving as an exchange for Bitcoin and Ethereum which as noted, the SEC has stated do not meet the United States Supreme Court Howey-test definition of security at this time. If the SEC takes a similar position the Company will consider evaluating the inclusion of Bitcoin Cash and Litecoin. Any future activities will necessarily be evaluated on a case by case basis as criteria are developed to evaluate digital assets seeking to utilize the platform and client certification processes. The Company only mines Bitcoin, Bitcoin Cash, and Litecoin, which may be considered for RiotX and our TessPay’s proposed tokens are not presently being considered and do not presently exist while TessPay is developing its business. At the present time the inclusion of additional digital assets have not been addressed by the Company and when addressed will be the subject of review which would include evaluating whether additional digital assets that seek to be registered for sale on the exchange would be permitted, whether activities will require further licensing or regulation by Logical Brokerage, and future interpretations by regulators in order to comply with applicable rules and regulation in effect from time to time. Competition, page 5 6. Please revise this section to also discuss the competition in the field of digital currency exchanges applicable to Logical Brokerage's business. Response: The following additional language will be added by amendment: We believe there are several companies operating digital currency exchange operations in the United States that will be competitors to Logical Brokerage and more potential competitors are expected to emerge. Little information is known about these companies inasmuch as they are privately owned and reliable information about their size and operations is not known. The current known competitors include: Ø Gemini Ø Coinbase Ø Itbit Ø Kraken Ø Poloniex / Circle Ø Bittrex Ø Bitstamp Ø Binance Ø Houbi 7. Please revise your statement that Overstock.com Inc. is one of your competitors to distinguish the activities of its subsidiary, Medici Ventures, from the activities of its retail business and to clarify that Medici Ventures may be considered one of your competitors. Response: The following additional information will be added by amendment: Of the competitors, we believe Overstock is among the best known as an e-retailer, Overstock has been investing in blockchain and cryptocurrency startups for several years through Medici Ventures, its wholly-owned subsidiary according to public reports by Overstock. Medici has more than a dozen portfolio companies, including tZero. T Zero is a wholly-owned subsidiary of Overstock.com that focuses on the development and commercialization of financial technology (“fintech”) with blockchain technology. In doing so, tZero hopes to bring greater efficiency and transparency to capital markets. On April 8, 2018 tZero, the blockchain subsidiary of Overstock.com, announced the release of a demo version of the prototype of its security token trading software which demonstrates how security tokens may be traded on the platform. tZero’s trading platform has been developed to compete with traditional stock exchanges by integrating cryptographically-secured distributed ledgers with existing market processes to reduce settlement time and costs, and increase transparency and efficiency. tZero has not set a launch date. Government Regulation, page 6 8. Please expand your disclosure to discuss the effect of existing or probable governmental regulations on your Logical Brokerage business, including financial services and consumer protection laws, and any regulations relating to required state money transmitter licenses. Please also discuss whether the operations of Logical Brokerage will trigger any obligations under the Securities Act or Securities Exchange Act, including any requirements to register as a national securities exchange, alternative trading system or broker-dealer, or any obligations to register with the CFTC as a futures exchange. Refer to Items 101(h)(4)(viii) and (ix) of Regulation S-K. Response: The following additional information will be added by amendment: Exchanges for securities must be registered as a national securities exchange or must be exempt from such registration requirement (e.g., registered broker-dealers operating as alternative trading systems). As a result, we do not currently intend for our planned cryptocurrency exchange operations through our Logical Brokerage subsidiary to allow trading in cryptocurrencies (including cryptocurrencies issued in ICOs) that may be classified as securities. Rather, we anticipate that such operations would, at least initially, facilitate the exchange of digital currencies like Bitcoin, Ethereum, and potentially Litecoin and Bitcoin Cash. Consistent with recent statements of SEC senior staff