Correspondence 0001104659-23-034137 from The9 LTD (NCTY)
The9 LTD
Date: March 20, 2023 · CIK: 0001296774 · Accession: 0001104659-23-034137
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-34238
Referenced dates: March 6, 2023
Letter
VIA EDGAR Office of Trade & Services Division of Corporate Finance Re: The9 Limited (the “Company”) Form 20-F for the Fiscal Year Ended December 31, 2021 Filed May 2, 2022 File No. 001-34238
Dear Ms. Beech and Ms. Beukenkamp,
This letter sets forth the Company’s responses to the comments contained in the letter dated March 6, 2023 from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) regarding the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2021 filed with the Commission on May 2, 2022 (the “2021 Form 20-F”) and the Company’s responses to the Staff’s comments regarding the 2021 Form 20-F filed on January 10, 2023. The Staff’s comments are repeated below in bold and are followed by the Company’s responses thereto. All capitalized terms used but not defined in this letter shall have the meaning ascribed to such terms in the 2021 Form 20-F.
Correspondence Filed January 10, 2023
Risk Factor, page 8
1. Please provide in the filing a description of your internal process for how you determine, or will determine as you expand your business, whether particular crypto assets (including NFTs) are securities within the meaning of the U.S. federal securities law. Please also clarify that such processes are risk-based assessments made by the company and are not a legal standard or binding on any regulatory body or court. Further, please include a risk factor addressing the uncertainty of such assessments and the consequences of making an incorrect assessment or a regulatory body or court disagreeing with the company’s assessment. Finally, please address the potential regulatory risks under the U.S. federal securities laws if such crypto assets are determined to be securities, such as compliance with Section 5 of the Securities Act or whether the company could become subject to regulation as a national securities exchange or as a broker-dealer under the Securities Exchange Act of 1934.
Securities and Exchange Commission
March 20, 2023
Page 2
In response to the Staff’s comment, the Company respectfully proposes to revise the referenced disclosure as follows (page references are made to the 2021 Form 20-F to illustrate the approximate location of the disclosure) in its future Form 20-F filings (with deletions shown as strike-through and additions underlined), subject to updates and adjustments to be made in connection with any material development of the subject matter being disclosed:
Page 79:
NFT Business
. . .
Internal procedures
As of the date of this annual report, we only mine Bitcoin. Public statements by senior officials at the SEC indicate that the SEC does not currently intend to take the position that Bitcoin is a security in its current form. The SEC defines securities based on the Howey Test, which says a security is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Therefore, for any other crypto assets, including our NFTs, we take this definition as determination guideline. However, the legal test for determining whether any given crypto asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.
We continue to analyze the cryptocurrencies which we mine and NFTs which we create under our internal policies and procedures on a periodic basis to ensure that they are not securities under U.S. federal and state securities laws. We closely monitor the new industry and regulatory developments and adjust our assessment accordingly. We may make the determination to cease support for a cryptocurrency for any one or a variety of factors based on a totality of the circumstances under our internal policies and procedures. However, a determination by the SEC or a court that a cryptocurrency constitutes a security could also result in our determination that it is advisable to discontinue operations with such cryptocurrency or ones that have similar characteristics to the cryptocurrency that was determined to be a security.
Our internal procedures do not constitute a legal standard or binding on any regulatory body or court, but are rather internal guidelines, which we use to make a risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a state or foreign regulatory authority, or a court were to determine that a supported crypto asset is a “security” under applicable laws. There can be no assurances that we will properly characterize over time any given crypto asset or product offering as a security or non-security.
Securities and Exchange Commission
March 20, 2023
Page 3
With respect to NFTs, we do not think NFTs produced by NFTSTAR are securities as they constitute art or collectibles with the consumptive value and they are finished products whose value is determined at a sale that is made directly to a buyer. We target consumers who are fans of sport stars and enjoy owning piece of their likeness. Our NFTs are not marketed to reward holders with appreciation, profit, or dividends. NFTSTAR is not obligated to and does not plan to distribute any profit from its operation to any NFT holders. Our NFTs are more resembling sports cards than investment product. NFTSTAR is not an agent for the sports stars and does not extend any managerial efforts that will enhance popularity of any star and hence the value of their NFTs. Moreover, our sales proceeds are not funds which are raised with the expectation that we will build system and that investors can earn a return on the instrument.
In respect to the other crypto assets, especially ones which operate on proof-of-stake mechanism like Ethereum, we will be closely monitoring new developments of fresh allegations of New York state regulator against crypto asset exchange. In a lawsuit filed against Seychelles-based crypto-exchange KuCoin in March 2023, New York Attorney General alleged the firm broke the law by selling unregistered securities. Among the unregistered securities listed in the suit was Ethereum. Proof-of-stake, to which Ethereum has transitioned its operations, bring Ethereum closer to a “security” because its interest payouts require little work and rhyme with the Howey Test’s “expectation of profit.” It was argued by New York Attorney General that, by shifting to proof-of-stake, Ethereum no longer relies upon competition between computers, but instead now relies on a pooling method that incentivizes users to own and stake Ethereum; and that the shift to proof-of-stake significantly impacted the core functionality and incentives for owning Ethereum, because Ethereum holders now can profit merely by participating in staking.
Ethereum has long been treated as a commodity by state and federal regulators, including the Commodity Futures Trading Commission (CFTC). Designating it as a security would have a big impact on crypto markets, drastically changing how (and whether) the currency and others like it are traded in the U.S. Our internal determination of various crypto assets will be impacted by the court determination as well. Despite the SEC being the principal federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately determined by a federal court. No court ruling has yet been made in connection with any crypto assets. With respect to crypto assets, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws.
Securities and Exchange Commission
March 20, 2023
Page 4
Page 23:
It is uncertain whether certain cryptocurrencies fall within the definition of a “security” under the U.S. federal, state or foreign securities laws. If one of the cryptocurrencies that we possess are deemed to be a security under any U.S. federal or state or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such cryptocurrency, and we could be subject to legal or regulatory action.
The SEC and its staff have taken the position that certain cryptocurrencies fall within the definition of a “security” under the U.S. federal securities laws. U.S. Supreme Court case law and the SEC staff have indicated that the determination as to whether a cryptocurrency is a security or not depends on the characteristics and use of that particular asset. As a result, determination as to whether a particular cryptocurrency is a security is a highly complex, fact-driven analysis whose outcome is difficult to predict. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements by senior officials at the SEC indicate that the SEC does not currently intend to take the position that Bitcoin or Ethereum are securities in their current form. Bitcoin and Ethereum are the only cryptocurrencies as to which senior officials at the SEC have publicly expressed a view. Moreover, such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other cryptocurrency. With respect to all other cryptocurrencies, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular cryptocurrency could be deemed a “security” under applicable laws. Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology published a framework for analyzing whether any given cryptocurrency is a security in April 2019, this framework is also not a rule, regulation or statement of the SEC and is not binding on the SEC.
With respect to Ethereum, proof-of-stake mechanism might have brought Ethereum closer to a “security” because its interest payouts require little work and rhyme with the Howey Test’s “expectation of profit.” In a lawsuit filed against Seychelles-based crypto-exchange KuCoin in March 2023, it was argued that by shifting to proof-of-stake, Ethereum no longer relies upon competition between computers, but instead now relies on a pooling method that incentivizes users to own and stake Ethereum; and that the shift to proof-of-stake significantly impacted the core functionality and incentives for owning Ethereum, because Ethereum holders now can profit merely by participating in staking.
The determination as to whether a cryptocurrency is a security is a fact-driven analysis and the outcome may be difficult to predict. Our risk-based assessments about whether certain cryptocurrencies are securities are not legal determinations. The classification of a cryptocurrency as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such assets. For example, a cryptocurrency that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in cryptocurrencies that are securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers and sellers to trade cryptocurrencies that are securities in the United States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system. Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency.
Securities and Exchange Commission
March 20, 2023
Page 5
To the extent that the SEC or a court determines that any cryptocurrency supported by a trading platform is a security, that determination could prevent the platform from continuing to facilitate the trading of that cryptocurrency. It could also result in regulatory enforcement penalties and financial losses to the platform if it was determined to have liability to its customers and thus had to compensate them for any losses or damages. Such a platform could also be subject to judicial or administrative sanctions for failing to offer or sell the cryptocurrency in compliance with securities registration requirements, or for acting as a securities broker or dealer without appropriate registration. Such an action could result in injunctions and cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Customers that traded those cryptocurrencies and suffered trading losses might also seek to rescind the transactions facilitated by the platform on the basis that such trades were conducted in violation of applicable law, which could subject the trading platform operator to significant liability and losses.
We are facing the legal risks associated with our non-fungible tokens or NFTs, page 23
2. Please revise this risk factor to specifically tailor your discussion of risks to your business and NFTs rather than NFTs generally. In this regard, we note that there are a number of general statements about NFTs and it is not clear the relevance to your business.
In response to the Staff’s comment, the Company respectfully proposes to revise the referenced disclosure as follows (page references are made to the 2021 Form 20-F to illustrate the approximate location of the disclosure) in its future Form 20-F filings (with deletions shown as strike-through and additions underlined), subject to updates and adjustments to be made in connection with any material development of the subject matter being disclosed:
Page 23:
The further development and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets could have an adverse material effect on the successful development and adoption of our NFT business.
The growth of the blockchain industry in general, as well as the blockchain networks on which our NFT business relies, is subject to a high degree of uncertainty. The factors affecting the further development of blockchain networks and digital assets, include, without limitation:
Securities and Exchange Commission
March 20, 2023
Page 6
· worldwide growth in the adoption and use of digital assets and other blockchain technologies;
· government and quasi-government regulation of digital assets an
Show Raw Text
CORRESP
1
filename1.htm
The9 Limited
17 Floor, No. 130 Wu Song Road
Hong Kou District, Shanghai 200080
People’s Republic of China
March 20, 2023
VIA EDGAR
Ms. Taylor Beech
Ms. Kate Beukenkamp
Office of Trade & Services
Division of Corporate Finance
100 F Street, NE
Washington, D.C., 20549
Re: The9 Limited (the “Company”)
Form 20-F for the Fiscal Year Ended December 31, 2021
Filed May 2, 2022
File No. 001-34238
Dear Ms. Beech and Ms. Beukenkamp,
This letter sets forth the
Company’s responses to the comments contained in the letter dated March 6, 2023 from the staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) regarding the Company’s annual report on Form 20-F for the fiscal
year ended December 31, 2021 filed with the Commission on May 2, 2022 (the “2021 Form 20-F”) and the Company’s responses
to the Staff’s comments regarding the 2021 Form 20-F filed on January 10, 2023. The Staff’s comments are repeated below in
bold and are followed by the Company’s responses thereto. All capitalized terms used but not defined in this letter shall have the
meaning ascribed to such terms in the 2021 Form 20-F.
Correspondence Filed January
10, 2023
Risk Factor, page 8
1. Please provide in the filing a description of your internal process for how you determine, or will
determine as you expand your business, whether particular crypto assets (including NFTs) are securities within the meaning of the U.S.
federal securities law. Please also clarify that such processes are risk-based assessments made by the company and are not a legal standard
or binding on any regulatory body or court. Further, please include a risk factor addressing the uncertainty of such assessments and the
consequences of making an incorrect assessment or a regulatory body or court disagreeing with the company’s assessment. Finally,
please address the potential regulatory risks under the U.S. federal securities laws if such crypto assets are determined to be securities,
such as compliance with Section 5 of the Securities Act or whether the company could become subject to regulation as a national securities
exchange or as a broker-dealer under the Securities Exchange Act of 1934.
Securities and Exchange Commission
March 20, 2023
Page 2
In response to the Staff’s
comment, the Company respectfully proposes to revise the referenced disclosure as follows (page references are made to the 2021 Form 20-F
to illustrate the approximate location of the disclosure) in its future Form 20-F filings (with deletions shown as strike-through and
additions underlined), subject to updates and adjustments to be made in connection with any material development of the subject matter
being disclosed:
Page 79:
NFT Business
. . .
Internal procedures
As of the date of this annual
report, we only mine Bitcoin. Public statements by senior officials at the SEC indicate that the SEC does not currently intend to take
the position that Bitcoin is a security in its current form. The SEC defines securities based on the Howey Test, which says a security
is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely
from the efforts of the promoter or a third party.” Therefore, for any other crypto assets, including our NFTs, we take this definition
as determination guideline. However, the legal test for determining whether any given crypto asset is a security is a highly complex,
fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance
or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved
over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the
governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.
We continue to analyze the
cryptocurrencies which we mine and NFTs which we create under our internal policies and procedures on a periodic basis to ensure that
they are not securities under U.S. federal and state securities laws. We closely monitor the new industry and regulatory developments
and adjust our assessment accordingly. We may make the determination to cease support for a cryptocurrency for any one or a variety of
factors based on a totality of the circumstances under our internal policies and procedures. However, a determination by the SEC or a
court that a cryptocurrency constitutes a security could also result in our determination that it is advisable to discontinue operations
with such cryptocurrency or ones that have similar characteristics to the cryptocurrency that was determined to be a security.
Our internal procedures do
not constitute a legal standard or binding on any regulatory body or court, but are rather internal guidelines, which we use to make a
risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable
laws. Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a state or foreign regulatory
authority, or a court were to determine that a supported crypto asset is a “security” under applicable laws. There can be
no assurances that we will properly characterize over time any given crypto asset or product offering as a security or non-security.
Securities and Exchange Commission
March 20, 2023
Page 3
With respect to NFTs, we
do not think NFTs produced by NFTSTAR are securities as they constitute art or collectibles with the consumptive value and they are finished
products whose value is determined at a sale that is made directly to a buyer. We target consumers who are fans of sport stars and enjoy
owning piece of their likeness. Our NFTs are not marketed to reward holders with appreciation, profit, or dividends. NFTSTAR is not obligated
to and does not plan to distribute any profit from its operation to any NFT holders. Our NFTs are more resembling sports cards than investment
product. NFTSTAR is not an agent for the sports stars and does not extend any managerial efforts that will enhance popularity of any star
and hence the value of their NFTs. Moreover, our sales proceeds are not funds which are raised with the expectation that we will build
system and that investors can earn a return on the instrument.
In respect to the other crypto
assets, especially ones which operate on proof-of-stake mechanism like Ethereum, we will be closely monitoring new developments of fresh
allegations of New York state regulator against crypto asset exchange. In a lawsuit filed against Seychelles-based crypto-exchange KuCoin
in March 2023, New York Attorney General alleged the firm broke the law by selling unregistered securities. Among the unregistered securities
listed in the suit was Ethereum. Proof-of-stake, to which Ethereum has transitioned its operations, bring Ethereum closer to a “security”
because its interest payouts require little work and rhyme with the Howey Test’s “expectation of profit.” It
was argued by New York Attorney General that, by shifting to proof-of-stake, Ethereum no longer relies upon competition between computers,
but instead now relies on a pooling method that incentivizes users to own and stake Ethereum; and that the shift to proof-of-stake significantly
impacted the core functionality and incentives for owning Ethereum, because Ethereum holders now can profit merely by participating in
staking.
Ethereum has long been treated
as a commodity by state and federal regulators, including the Commodity Futures Trading Commission (CFTC). Designating it as a security
would have a big impact on crypto markets, drastically changing how (and whether) the currency and others like it are traded in the U.S.
Our internal determination of various crypto assets will be impacted by the court determination as well. Despite the SEC being the principal
federal securities law regulator in the United States, whether or not an asset is a security under federal securities laws is ultimately
determined by a federal court. No court ruling has yet been made in connection with any crypto assets. With respect to crypto assets,
there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we
may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security”
under applicable laws.
Securities and Exchange Commission
March 20, 2023
Page 4
Page 23:
It is uncertain whether
certain cryptocurrencies fall within the definition of a “security” under the U.S. federal, state or foreign securities laws.
If one of the cryptocurrencies that we possess are deemed to be a security under any U.S. federal or state or foreign jurisdiction, or
in a proceeding in a court of law or otherwise, it may have adverse consequences for such cryptocurrency, and we could be subject to legal
or regulatory action.
The SEC and its staff have
taken the position that certain cryptocurrencies fall within the definition of a “security” under the U.S. federal securities
laws. U.S. Supreme Court case law and the SEC staff have indicated that the determination as to whether a cryptocurrency is a security
or not depends on the characteristics and use of that particular asset. As a result, determination as to whether a particular cryptocurrency
is a security is a highly complex, fact-driven analysis whose outcome is difficult to predict. It is also possible that a change in the
governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public
statements by senior officials at the SEC indicate that the SEC does not currently intend to take the position that Bitcoin or Ethereum
are securities in their current form. Bitcoin and Ethereum are the only cryptocurrencies as to which senior officials at the SEC have
publicly expressed a view. Moreover, such statements are not official policy statements by the SEC and reflect only the speakers’
views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other cryptocurrency. With respect
to all other cryptocurrencies, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding
the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular cryptocurrency could be deemed
a “security” under applicable laws. Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology
published a framework for analyzing whether any given cryptocurrency is a security in April 2019, this framework is also not a rule, regulation
or statement of the SEC and is not binding on the SEC.
With respect to Ethereum,
proof-of-stake mechanism might have brought Ethereum closer to a “security” because its interest payouts require little work
and rhyme with the Howey Test’s “expectation of profit.” In a lawsuit filed against Seychelles-based crypto-exchange
KuCoin in March 2023, it was argued that by shifting to proof-of-stake, Ethereum no longer relies upon competition between computers,
but instead now relies on a pooling method that incentivizes users to own and stake Ethereum; and that the shift to proof-of-stake significantly
impacted the core functionality and incentives for owning Ethereum, because Ethereum holders now can profit merely by participating in
staking.
The determination as to whether
a cryptocurrency is a security is a fact-driven analysis and the outcome may be difficult to predict. Our risk-based assessments about
whether certain cryptocurrencies are securities are not legal determinations. The classification of a cryptocurrency as a security under
applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such
assets. For example, a cryptocurrency that is a security in the United States may generally only be offered or sold in the United States
pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that
effect transactions in cryptocurrencies that are securities in the United States may be subject to registration with the SEC as a “broker”
or “dealer.” Platforms that bring together purchasers and sellers to trade cryptocurrencies that are securities in the United
States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated
by a registered broker-dealer as an alternative trading system. Persons facilitating clearing and settlement of securities may be subject
to registration with the SEC as a clearing agency.
Securities and Exchange Commission
March 20, 2023
Page 5
To the extent that the SEC
or a court determines that any cryptocurrency supported by a trading platform is a security, that determination could prevent the platform
from continuing to facilitate the trading of that cryptocurrency. It could also result in regulatory enforcement penalties and financial
losses to the platform if it was determined to have liability to its customers and thus had to compensate them for any losses or damages.
Such a platform could also be subject to judicial or administrative sanctions for failing to offer or sell the cryptocurrency in compliance
with securities registration requirements, or for acting as a securities broker or dealer without appropriate registration. Such an action
could result in injunctions and cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability,
and reputational harm. Customers that traded those cryptocurrencies and suffered trading losses might also seek to rescind the transactions
facilitated by the platform on the basis that such trades were conducted in violation of applicable law, which could subject the trading
platform operator to significant liability and losses.
We are facing the legal
risks associated with our non-fungible tokens or NFTs, page 23
2. Please revise this risk factor to specifically tailor your discussion of risks to your business and
NFTs rather than NFTs generally. In this regard, we note that there are a number of general statements about NFTs and it is not clear
the relevance to your business.
In response to the Staff’s
comment, the Company respectfully proposes to revise the referenced disclosure as follows (page references are made to the 2021 Form 20-F
to illustrate the approximate location of the disclosure) in its future Form 20-F filings (with deletions shown as strike-through and
additions underlined), subject to updates and adjustments to be made in connection with any material development of the subject matter
being disclosed:
Page 23:
The further development
and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are subject to a variety of factors that
are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets could
have an adverse material effect on the successful development and adoption of our NFT business.
The growth of the blockchain
industry in general, as well as the blockchain networks on which our NFT business relies, is subject to a high degree of uncertainty.
The factors affecting the further development of blockchain networks and digital assets, include, without limitation:
Securities and Exchange Commission
March 20, 2023
Page 6
· worldwide growth in the adoption and use of digital assets and other blockchain technologies;
· government and quasi-government regulation of digital assets an