Regulation Crypto Assets: SEC Proposes Bespoke Offering Regime for Certain Crypto Assets

Seeking to establish a new framework for offerings of investment contracts involving crypto assets, the US Securities and Exchange Commission’s proposed Regulation Crypto Assets would, if adopted, establish two new exemptions from the registration requirements of Section 5 under the Securities Act; a safe harbor from being deemed an investment contract under the Securities Act and Exchange Act; and a definition of “qualified purchaser” under the Securities Act that would preempt state securities law registration and qualification with respect to offers and sales of covered investment contracts conducted pursuant to a Regulation Crypto Assets exemption.

Positioned as the SEC’s effort to support capital formation and innovation in the crypto markets while maintaining appropriate investor protections, Regulation Crypto Assets may bring welcome clarity to many stakeholders, including innovators and developers who seek to raise capital through the offer and sale investment contracts involving crypto assets for crypto-related projects, while broader legislative efforts in Congress remain delayed.

A NEW FRAMEWORK FOR COVERED INVESTMENT CONTRACTS

Proposed on August 18, Regulation Crypto Assets builds on the SEC’s March 2026 interpretative release regarding the application of the federal securities laws to certain crypto assets by creating a regulatory framework for transactions in which a non-security crypto asset is offered or distributed as part of an investment contract.[1]

Many crypto assets have been deemed to be investment contracts (one of the enumerated categories of securities under the applicable statute) by the SEC over the last decade through its application of the seminal Howey test, which determines whether a financial instrument in an investment contract is subject to the federal securities laws.[2]

In Regulation Crypto Assets, the SEC proposes to define a “covered investment contract” as a contract, transaction, or scheme that constitutes an investment contract, provided that the investment contract meets the following requirements: (1) a crypto asset is subject to the investment contract, (2) such crypto asset is not a security, and (3) no asset other than such crypto asset (including any security or non-security asset) is subject to the investment contract.  

As discussed in more detail below, the proposed exemptions, which include “bad actor” disqualifications and remain subject to anti-fraud and anti-manipulation provisions, would permit limited capital-raising activities and distributions of covered investment contracts subject to certain conditions, including tailored principles-based disclosure requirements, the scope of which would vary depending on the specific exemption.

OFFERING EXEMPTIONS: THE STARTUP EXEMPTION

The proposed startup exemption would allow issuers to offer covered investment contracts during a period of up to four years subject to a $5 million aggregate offering limit. While nonexclusive such that an issuer could seek to avail itself of other exemptions or safe harbors from registration, it is a “one-time only” exemption because it restricts an issuer and its affiliates from relying on the exemption again for the same or a substantially similar crypto asset. 

As proposed, the startup exemption provides issuers with a regulatory runway during which they may work to fulfill the representations or promises to engage in essential “managerial efforts” made under a covered investment contract without complying with the more burdensome registration provisions of the Securities Act of 1933, as amended (the Securities Act).

The exemption would be available for a variety of transactions (i.e., “covered transactions” under the proposal) including any public or private offering in one or a series of capital-raising transactions and public or private distributions, such as airdrops, rewards, or incentives of covered investment contracts. Specifically, an issuer may conduct covered transactions during a period beginning after it files a notice of reliance (i.e., a Form NOR) and ending the earlier of four years after such filing or the filing of a transition report. 

Similar to notice filings used for other capital-raising safe harbors, such as Form D, Form NOR would contain relatively limited information concerning the issuer and subject crypto asset, the location of required disclosures, and specified certifications. But, since the exemption is only available after the Form NOR is filed, the SEC notes that communications made before the notice is filed may still be deemed “offers” under Section 2(a)(3) of the Securities Act and not eligible for the startup exemption.

At the end of the exemption period the issuer would be required to file a transition report on proposed Form TR to address the status of the covered investment contract, the subject crypto asset, and the associated network or application. If the issuer has completed or otherwise permanently ceased the essential managerial efforts it represented or promised to undertake, Form TR would also serve as the filing used to satisfy the proposed investment contract safe harbor, discussed in more detail below.

OFFERING EXEMPTIONS: THE FUNDRAISING EXEMPTION

For larger offerings, Regulation Crypto Assets also provides a fundraising exemption, which is a nonexclusive exemption structured in two tiers modeled in large part on Regulation A, which some issuers of crypto assets, such as ICOs, have sought to rely on in the past. Under the fundraising exemption, Tier 1 would permit offerings of up to $20 million in any 12-month period, and Tier 2 would permit offerings of up to $75 million in any 12-month period.

Similar to Regulation A, issuers would be required to file an offering statement containing required disclosures with the SEC and sales could not occur until the offering statement has been qualified, but testing-the-waters communications, including before qualification, would be permitted.

Given the larger offering amounts available under the fundraising exemption, the proposed disclosure regime would be more fulsome than the shorter notice filing for the startup exemption and include, for example, financial statements requirements. The fundraising exemption would only be available to domestic entities and require that a majority of the issuer’s executive officers or directors are US citizens or residents, more than 50% of the issuer’s assets are located in the United States, and the issuer’s business is administered principally in the United States.

General solicitation would be permissible and nonaccredited investors may participate in the offering so long as the purchaser’s aggregate purchase price does not exceed 10% of the greater of the purchaser’s annual income or net worth. In this respect, an issuer can rely on the self-representations of the prospective purchaser unless it has reason to know that such representation is untrue. In a departure from the flexibility that a Tier 1 offering under Regulation A provides, the investment limitation for nonaccredited investors is applicable in either tier under the fundraising exemption.

Issuers that rely on the fundraising exemption would be subject to ongoing periodic and transition reporting with the SEC. The proposed annual, semi-annual, and current reports would be modeled on analogous Regulation A forms but tailored to covered investment contracts and their issuers.

INVESTMENT CONTRACT SAFE HARBOR

Regulation Crypto Assets would establish a nonexclusive safe harbor intended to provide greater certainty regarding when a covered investment contract has ceased to exist. Under proposed Rule 400, a covered investment contract would be deemed to cease to exist—and the crypto asset that had been subject to the investment contract would be deemed no longer subject to that investment contract for purposes of the Securities Act and Securities Exchange Act of 1934, as amended (Exchange Act) definitions of “security”—if the conditions of the safe harbor are satisfied.

A principal, substantive condition of the safe harbor would require the issuer to have completed or permanently ceased all essential managerial efforts it represented or promised to undertake under the covered investment contract and that it does not make, or intend to make, new representations or promises to engage in essential managerial efforts with respect to such crypto asset.

In addition, an issuer relying on the safe harbor must file a Form TR that describes the covered investment contract and crypto asset, certifies that the condition has been satisfied, and provides an analysis supporting that certification. Notably, the safe harbor would be available regardless of whether the issuer previously relied on the startup or fundraising exemptions. 

Unlike the transactional startup and fundraising exemptions, which exempt certain transactions from registration under the Securities Act, the investment contract safe harbor has broader import because, if satisfied, the subject crypto asset would not be deemed a security and thus the reporting, registration, and other requirements of the federal securities laws would no longer apply.

PREEMPTION OF STATE SECURITIES REGISTRATION REQUIREMENTS

Regulation Crypto Assets would significantly limit the role of state securities registration and qualification requirements. Proposed Rule 500 would define “qualified purchaser” for purposes of Section 18(b)(3) of the Securities Act to include persons to whom securities are offered or sold pursuant to Regulation Crypto Assets, subject to specified conditions. As a result, covered investment contracts sold under the proposed exemptions would be treated as “covered securities,” preempting certain state securities registration and qualification requirements.

Preemption would apply to offerings conducted under both the startup exemption and the fundraising exemption, including both Tier 1 and Tier 2 fundraising offerings, which differs from Regulation A, under which Tier 1 offerings may remain subject to state-level registration or qualification.

The proposed preemption of state securities registration and qualification requirements would also apply to certain secondary market transactions by persons other than the issuer, an underwriter, or a dealer, provided that the issuer has satisfied the requirements of a Regulation Crypto Assets exemption and remains current with the applicable disclosure, filing, and periodic reporting obligations.

KEY TAKEAWAYS

The proposed Regulation Crypto Assets seeks to create a new offering regime specifically tailored to covered investment contracts involving non-security crypto assets and provide a clear definitional safe harbor for when a crypto asset subject to a covered investment contract ceases to be a security.

As such, the proposed regulation provides both a runway for limited, tailored compliance with the Securities Act for distributions and capital-raising efforts and an exit ramp from the purview of the SEC that takes into consideration the unique aspects of the “investment contract” analysis that have not always translated well to a fully functioning and independent crypto asset, such as the reliance on the managerial efforts of others.

As with any proposed rulemaking, it remains to be seen what aspects, if any, will be removed or modified through the rulemaking process. In this respect, the proposing release invites public comment and poses a number of inquiries for which it seeks input from all stakeholders.

It is also important to emphasize that the regulation was proposed shortly after the CLARITY Act, the proposed market infrastructure bill, was delayed yet again. SEC Chair Paul Atkins released a statement in conjunction with Regulation Crypto Assets that applauded the efforts of the SEC to advance the adoption of clear and meaningful rulemaking tailored to crypto assets while still acknowledging that congressional action through comprehensive market infrastructure legislation remained a critical and important necessity for the industry.