SEC Proposes New Framework for Crypto Offerings

Key Takeaways

• New Crypto Offering Framework: The SEC has proposed Regulation Crypto Assets, creating a securities offering regime specifically tailored to certain investment contracts involving crypto assets.
• Two Registration Exemptions: Issuers could raise up to $5 million over four years under a one-time exemption or up to $75 million during each 12-month period under a second exemption with additional financial and ongoing reporting requirements.
• A Path Out of Investment-Contract Status: A conditional safe harbor would allow a crypto asset to be deemed no longer subject to an investment contract for purposes of federal securities law when the required conditions are satisfied.
• Federal Rules Would Preempt Certain State Requirements: The proposal would preempt state securities registration and qualification requirements for offerings under the new exemptions and certain secondary-market transactions.

Deep Dive

The SEC recently proposed “Regulation Crypto Assets,” a new framework that would give issuers of certain investment contracts involving crypto assets two purpose-built ways to raise capital without registering the offering under the Securities Act of 1933. One would allow up to $5 million to be raised over four years. The other would permit as much as $75 million in each 12-month period.

Neither is a free pass. Both would require issuers to provide investors with principles-based narrative disclosures, while companies using the larger exemption would also have to provide financial statements and comply with ongoing reporting requirements. But the proposal matters for something larger than the dollar limits. It is an attempt to write rules around crypto as it actually exists, rather than continue asking a market built on tokens, networks and evolving projects to squeeze itself into securities exemptions designed for something else.

Regulation Crypto Assets follows an SEC interpretation issued in March that sought to clarify how federal securities laws apply to crypto assets and transactions involving them. The new rules would build on that interpretation by creating a securities offering regime specifically for certain investment contracts involving crypto assets, while also addressing the question that has dogged the industry for years: whether an asset associated with an investment contract must remain caught within that legal relationship forever.

The SEC's proposed answer is no, at least not necessarily. A conditional safe harbor would provide that a crypto asset is no longer subject to an investment contract for purposes of the definitions of “security” under the Securities Act and Securities Exchange Act if the conditions of the safe harbor have been satisfied. SEC Chairman Paul S. Atkins described the point at which that could happen as the moment when an issuer has completed, or permanently ceased, all of the essential managerial efforts it represented or promised it would undertake under the investment contract.

It is a technical distinction with considerable consequences. A crypto project can change substantially between the moment money is raised and the point at which a network, protocol or other venture is operating without the managerial work on which investors initially relied. The proposal would give that transition a place in the regulatory framework rather than leaving the original investment arrangement to cast an indefinite shadow over the asset.

For issuers, the two exemptions would offer different routes through that framework. The smaller exemption is deliberately narrow. An issuer could raise no more than $5 million during a four-year period, making it a one-time route for relatively modest offerings. The second would be considerably broader, allowing up to $75 million during each 12-month period. The price of that additional capacity would be greater disclosure and reporting obligations, including financial statements and continuing reports.

The architecture is familiar even if the subject is not. Securities regulation has long traded easier access to capital for conditions meant to tell investors what they are buying and whom they are trusting with their money. Regulation Crypto Assets would preserve that bargain while changing its dimensions for a market that has repeatedly found existing routes ill-suited to the way crypto projects are financed and developed.

“As we continue the Commission’s efforts to provide clarity for crypto markets, and as Congress works to establish a lasting regulatory framework, Regulation Crypto Assets seeks to provide crypto asset entrepreneurs and market participants with clear pathways to raise capital under the federal securities laws,” Atkins said.

The reference to Congress is important. The SEC is proposing these rules while lawmakers continue working on a broader statutory framework for crypto markets. Regulation Crypto Assets would operate within the securities laws Congress has already written rather than wait for that larger project to be finished.

It would also settle another practical question for issuers using the new exemptions. The proposal would preempt state securities registration and qualification requirements for securities offered and sold under Regulation Crypto Assets, as well as for certain secondary-market transactions. An issuer complying with the federal exemption would therefore not face a second layer of state registration requirements for the same offering.

That fits with one of the SEC's stated ambitions for the proposal, which reaches beyond legal clarity and into the geography of the crypto business itself. The Commission wants to reduce the incentive for issuers to build and operate offshore.

For much of crypto's history, regulatory uncertainty in the United States has not merely been a lawyer's problem. It has influenced where companies form, where projects are launched, which investors can participate and how much legal risk accompanies an attempt to raise money domestically. The SEC is now explicitly treating that uncertainty as something that can push innovation beyond U.S. borders.

Atkins put the objective more plainly, calling the proposal another step in the Commission's effort to “onshore innovation in crypto asset markets.”

That is a notable choice of words from an agency whose relationship with the industry has often been defined by arguments over enforcement. Regulation Crypto Assets begins from a different premise. It assumes that at least some crypto projects will raise capital through arrangements governed by federal securities laws and asks what rules would allow them to do so in the United States without abandoning the protections those laws were written to provide.

There will still be boundaries. There will still be disclosures. And there will still be crypto transactions that fall within federal securities law outside the proposed exemptions. What changes is the availability of a regulatory path designed specifically for the transaction taking place.

The SEC described the proposal as a way to expand investment opportunities for U.S. investors while giving them stronger and more consistent protections. Whether the eventual rules accomplish both will depend on what survives the rulemaking process and, eventually, how issuers behave under them. But the proposal itself marks a change in what the Commission is trying to do.

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