On May 6, 2022, the Securities and Exchange Commission (SEC) announced a settled enforcement action against NVIDIA Corporation in connection with allegations that the technology company inadequately disclosed the impact of cryptomining on its gaming business in two Form 10-Q filings in fiscal year 2018 and allegedly misled investors as to the significance of cryptomining in year-over-year revenue growth. Without admitting or denying the SEC's findings, NVIDIA agreed to pay a $5.5 million penalty. The SEC's action highlights that disclosure of known trends and uncertainties in Management's Discussion and Analysis (MD&A) continues to be an area of interest to the SEC and is a reminder to public companies to examine their disclosure.

Cryptomining Impact on NVIDIA's Business

According to the SEC's order, during the relevant fiscal periods, NVIDIA's GPU Business segment was experiencing revenue growth attributable to increased demand for both its graphics processing units (GPUs), which were designed and marketed for gaming, and its cryptomining processers, referred to as CMPs, which were "marketed to large cryptomining operations." In its MD&A in the relevant Forms 10-Q, the company "identified cryptomining as a significant element" of its CMP sales but did not discuss cryptomining in the context of its gaming GPU sales. However, the SEC alleges that, during the relevant fiscal periods, the company became aware "that cryptomining was a significant factor in year-over-year growth" in the company's gaming GPU revenue, even though not disclosed in those Forms 10-Q.

Item 303(c)(2) of Regulation S-K (formerly, during the relevant period, Item 303[b][2]) requires public companies to disclose in their quarterly reports any material changes in results of operations between the current quarter and the corresponding prior year quarter. An instruction to Item 303(c) also requires that the company "identify any significant elements of the registrant's income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant's ongoing business." In addition, the SEC's 2003 Interpretive Advice states that if there are "material unusual or non-recurring items, aberrations, or other significant fluctuations, companies should … provide disclosure where necessary for investors to ascertain the likelihood that past performance is indicative of future performance."

The SEC alleges that the failure "to disclose that cryptomining was a significant factor in the material year-over-year growth in NVIDIA's Gaming revenue" resulted in "Forms 10-Q [that] omitted significant information relating to NVIDIA's GPU segment revenue and its component GPUs for gaming, and any related risks, during these quarters." The foregoing alleged omission, taken together with the disclosure of the impact of cryptomining to sales of the company's CMPs "gave the misimpression in the Forms 10-Q during the relevant period that the year-over-year growth in the company's Gaming revenue was not meaningfully impacted by cryptomining." In addition, the SEC order noted that given the volatility of cryptocurrency and the corresponding uncertainty regarding the long-term viability of cryptomining, analysts and investors were interested in determining whether NVIDIA's Gaming revenue increases were attributable to cryptomining, and whether the company's past performance was indicative of its future performance.

SEC Violations

The SEC found that NVIDIA violated Sections 17(a)(2) and (3) of the Securities Act, which are negligence-based (rather than scienter-based) securities law claims and prohibit material misstatements or omissions in the offer or sale of securities. The SEC also found that NVIDIA violated Section 13(a) of the Exchange Act and Rule 13a-13 thereunder, which require companies to file complete and accurate quarterly reports, including Forms 10-Q, with the SEC, and Exchange Act Rule 12b-20, which requires companies to include additional material information, if any, as may be necessary to make the statements required in the filing, in light of the circumstances under which they are made, not misleading. Finally, the SEC found that the company violated Exchange Act Rule 13a-15(a), which requires public companies to maintain disclosure controls and procedures to ensure that information required to be disclosed in periodic reports such as Form 10-Q is accumulated and communicated to management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, and summarized within the time periods necessary to timely file reports with the SEC.

Takeaways

In light of the SEC's enforcement action against NVIDIA, companies should consider the following takeaways:

• MD&A continues to be an area of interest to the SEC, including traditional precepts such as disclosing known trends and uncertainties, in addition to the disclosure requirements under the recent amendments to MD&A.
• Consistent with other guidance through the years, such as relating to cybersecurity, climate change, and COVID-19, the SEC continues to demonstrate a willingness to apply its traditional MD&A disclosure guidance to new areas, such as cryptomining or cryptocurrency, that may impact results of operations or financial condition.
• Companies should consider a periodic review and evaluation of their disclosure controls and procedures to ensure that all information required to be disclosed by the company is provided to management to allow for timely decisions regarding required disclosure.

For more information on this SEC enforcement action or any related matter, please contact any member of the firm's public company representation and securities litigation practices.