SEC Proposes Long-Awaited Regulation for Primary Token Issuance

The Securities and Exchange Commission on Aug. 18 proposed Regulation Crypto Assets ("Reg Crypto"), the first set of U.S. securities rules designed specifically around the offer and sale of crypto assets rather than adapted from rules written for corporate stock.

First, the proposal would create a lawful path to sell certain tokens to the U.S. public, including non-accredited buyers, without a registered offering. Second, it would create a formal, dated mechanism for the investment contract associated with a token to cease to exist. For most of the past decade, a U.S. token issuer effectively chose between registering (which almost none could practically do) and issuing offshore. Reg Crypto offers a third option, along with an off-ramp for thousands of tokens already trading with unresolved legal status.

The rule would apply only to a crypto asset that is not itself a security but was offered or sold as part of an investment contract under which the issuer promised to build something. Tokenized stocks and bonds, and arrangements that bundle a token with equity or other securities, sit outside the framework by design. Within that perimeter, the proposal follows four stages:

• Raise. A one-time startup exemption would allow an issuer to raise up to $5m over as many as four years, with public filings at the beginning and end of the period. A larger exemption modeled on Regulation A would permit offerings of up to $20m or $75m, depending on the tier, over a 12-month period. This fundraising exemption would require SEC qualification, ongoing reporting, financial statements (audited for Tier 2 offerings), and an issuer with substantial organizational, management, and asset ties to the U.S. Unaccredited buyers would be limited to 10% of their annual income or net worth, whichever is higher.

• Disclose. Issuers would provide purpose-built information covering token supply and release schedules, mint-and-burn mechanics, governance and smart-contract permissions, source code, and - most importantly - what the issuer promised to build and how far along it is.

• Build. The startup exemption would provide a runway of no more than four years during which the issuer could carry out its promised essential managerial efforts.

• Exit. Once the issuer has completed or permanently ceased those efforts, is making no new promises to undertake them, and files a transition report, the covered investment contract would be deemed to have ceased to exist. The SEC would then treat the crypto asset as no longer subject to that investment contract under the Securities Act and Exchange Act. The safe harbor would also be available to issuers that never used either fundraising exemption, which is what makes it relevant for tokens issued years ago.