SEC’s Proposed Regulation Crypto Assets: What It Means and Why It Matters

With congressional efforts to enact comprehensive crypto legislation—including the CLARITY Act—stalled for the time being, the SEC has made its own rule proposal based on Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets, Release No. 33-11412 (Mar. 23, 2026), input from its Crypto Task Force, the President’s Working Group on Digital Asset Markets (Executive Order 14178) and Chairman Atkins’ “Project Crypto” Initiative. If adopted, the new rules known as “Regulation Crypto Assets” would establish an offering regime for certain investment contracts involving crypto assets (defined as “covered investment contracts”), and provide issuers of covered investment contracts with certain pathways to raise capital under the federal securities laws.

The SEC explained that a non-security crypto asset becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits. Under the proposed rules, a “covered investment contract” is an investment contract that must meet these three requirements: (i) a crypto asset is subject to the investment contract; (ii) such crypto asset is not a security; and (iii) no asset other than such crypto asset (including any security or non-security assets) is subject to the investment contract.  In other words, Regulation Crypto Assets will not apply to tokenized equity offerings, multi-asset baskets or investment contracts involving "digital securities," among other things. 

The Problem the SEC Is Trying to Solve

Existing securities regulations were developed for conventional investment products and do not account for the unique attributes of crypto assets. For example, although a crypto asset may be subject to an investment contract when first offered or sold (and therefore, federal securities laws), it may subsequently “cease to be subject to” an investment contract. Given the uncertainty of the application of federal securities laws, many issuers of crypto assets have ceased offering such assets in the U.S. to avoid the U.S. regulatory complexity, which limits investment opportunities for domestic investors and may cause them to invest in foreign markets with fewer protections. Regulation Crypto Assets is intended to facilitate capital formation for covered investment contracts and accommodate innovation in the crypto asset markets within specific guardrails.

Four Key Components of the Proposal

1. Startup Exemption

The startup exemption is a one-time, non-exclusive exemption from the registration requirements of the Securities Act. It would permit issuers to conduct offerings of covered investment contracts of up to $5 million during a period of up to four years, subject to certain conditions, including making public filings at the beginning and end of the period and providing “principles-based narrative disclosures” to investors. The exemption would provide temporary relief to issuers while they work toward fulfilling the essential managerial efforts they promised investors under an investment contract (e.g., to develop and achieve functionality for a non-security crypto asset and/or develop an associated crypto network or associated crypto application together with a business plan containing detailed milestones, a timeline, information about personnel, sources of funding, an explanation of how holders of non-security crypto asset will profit from those efforts, etc.). Issuers relying on this exemption would remain subject to antifraud and antimanipulation provisions of the federal securities laws.

2. Fundraising Exemption

The fundraising exemption is modeled in part on Regulation A and provides a non-exclusive exemption from the registration requirements of the Securities Act for larger offerings in two tiers with different offering limits. Tier 1 would permit offerings of up to $20 million in a 12-month period. Tier 2 would permit offerings of up to $75 million in a 12-month period, but issuers seeking a Tier 2 exemption would be required to provide audited financial statements, and be subject to ongoing reporting requirements. Issuers seeking exemption under either Tier 1 or Tier 2 would be required to file offering materials to make certain principles-based narrative disclosures available to the investors.

Importantly, the fundraising exemption includes issuer eligibility requirements: issuers must be U.S.-organized entities with a majority of executive officers or directors who are U.S. citizens or residents, more than 50% of assets located in the United States, and business administered principally in the United States. Blank check companies, investment companies under the Investment Company Act of 1940 and “bad actors” under the same framework used in Regulation A are specifically excluded.

3. Investment Contract Safe Harbor

The investment contract safe harbor may be the most significant element of the proposal. Although a crypto asset, when first offered or sold, may be subject to an investment contract (and therefore, federal securities laws), it “ceases to be subject to” an investment contract when the issuer of the covered investment contract has fulfilled all its obligations and representations, or otherwise has permanently ceased all essential managerial efforts, or when the purchaser would not reasonably expect the issuer to continue its essential managerial efforts. Once the value of the relevant crypto asset is no longer derived from the essential managerial efforts of the issuer, any representations or promises to provide services (e.g., to secure, maintain, improve or enhance the associated crypto network or application after it has become functional) will fail the Howey test and fall outside the purview of the federal securities laws. Upon satisfying this conditional safe harbor and filing a transition report with the SEC, the covered investment contract would be deemed to have ceased to exist, and the underlying crypto asset would no longer be treated as a “security” for purposes of the federal securities laws.

4. State Law Preemption

The proposal would add a definition of “qualified purchaser” under the Securities Act to preempt state securities law registration and qualification requirements for offers and sales of covered investment contracts issued pursuant to Regulation Crypto Assets. This preemption would apply to both primary offerings and certain secondary market transactions, continuing for as long as the issuer satisfies the applicable information and reporting requirements.

Key Takeaways

• Tiered exemption from registration. The startup and fundraising exemptions would provide a graduated framework for certain investment contracts involving crypto assets to raise capital without registration under the Securities Act—up to $5 million over four years under the startup exemption, and up to $75 million per year under the fundraising exemption.

• Conditional safe harbor from “investment contract” in the definition of “security.” Once issuers have fulfilled their obligations to investors under the covered investment contract, that covered investment contract has ceased to exist, and the underlying crypto asset would be deemed not to be subject to an investment contract in the definition of “security” and therefore, would be no longer subject to the federal securities laws.

• Federal preemption of state requirements. Offerings conducted under Regulation Crypto Assets would be exempt from state securities registration and qualification requirements, reducing the compliance burden of navigating multiple jurisdictions.

• Continued antifraud obligations. Issuers relying on these non-exclusive exemptions remain subject to the antifraud and antimanipulation provisions of the federal securities laws.

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.