Absent CLARITY, the SEC Charts Its Own Path (for Now)

Background

While the crypto asset market has continued to expand and converge with traditional finance, existing SEC rules, largely adopted before crypto assets emerged, have in many cases presented a poor fit for crypto assets and raised difficult interpretive questions regarding their application. As the SEC indicates, applying existing regulatory requirements to the crypto asset market has, among other issues, complicated transaction planning, impeded capital formation and innovation, and pushed some issuers to conduct transactions offshore, reducing options and protections for U.S. investors.

Now, with the U.S. Senate adjourning for recess without advancing the CLARITY Act, the SEC chose to act. Building on its March 2026 interpretive release that clarified how the federal securities laws do and do not apply to certain crypto assets and related transactions, the Commission has proposed “Regulation Crypto Assets.” Regulation Crypto Assets is comprised of four key regulatory provisions for crypto assets:

• A startup exemption,
• A fundraising exemption,
• A non-exclusive, conditional safe harbor for investment contracts under the Howey test, and
• Preemption of state registration and qualification requirements.

Startup Exemption

The startup exemption would provide a non-exclusive exemption from Securities Act registration, available to an entity, individual or group, permitting issuers to conduct offers, sales, and other distributions of covered investment contracts of up to $5 million over a period of up to four years. The exemption would be available only once by the issuer and its affiliates with respect to the same or a substantially similar subject crypto asset. Issuers would be required to (1) make public filings at the beginning and end of the period, and (2) make publicly available, and periodically update, certain narrative disclosures concerning the offering. This exemption is designed to give issuers temporary relief from registration while they work to fulfill the essential managerial efforts represented or promised to investors under the covered investment contract, keeping investors adequately informed along the way. Issuers relying on this exemption would remain subject to the anti-fraud and anti-manipulation provisions of the federal securities laws.

Fundraising Exemption

The fundraising exemption would provide a non-exclusive, two-tier exemption from Securities Act registration. The exemption, which would be available only to U.S.-organized entities with a majority U.S. presence, was modeled in part on Regulation A. Tier 1 would permit offerings of up to $20 million of covered investment contracts in a 12-month period, and Tier 2 would permit offerings of up to $75 million in a 12-month period. Issuers relying on this exemption would be required to publicly file offering materials, including the same principles-based narrative disclosures required under the startup exemption, a discussion of financial condition, and financial statements (audited for Tier 2 offerings), as well as comply with ongoing reporting requirements. This exemption is intended to facilitate larger capital raises compared to the startup exemption, and issuers would similarly remain subject to the anti-fraud and anti-manipulation provisions of the federal securities laws.

Investment Contract Safe Harbor

The investment contract safe harbor would provide clarity as to when a crypto asset has separated from the investment contract created through its offering by providing a non-exclusive, conditional safe harbor from the term “investment contract” in the definitions of “security” under the Securities Act and the Securities Exchange Act. Where the conditions below are satisfied, the Commission would deem the covered investment contract to have ceased to exist, and the underlying crypto asset would no longer qualify as an “investment contract” under the Howey test. This safe harbor is intended to apply to crypto assets that may have been initially offered and sold pursuant to investment contracts, but which are no longer subject to such contracts.

To satisfy the safe harbor, an issuer must have (1) completed or permanently ceased all essential managerial efforts it represented or promised to undertake under the covered investment contract, with no intention of making new such promises, and (2) made a public filing certifying satisfaction of the safe harbor conditions, supported by an analysis. This framework builds on the Commission’s March 2026 interpretive release and is intended to give market participants greater clarity on when a covered investment contract has ended, and when the underlying crypto asset is no longer subject to the federal securities laws as a result. However, the Commission notes that, while the investment contract safe harbor would control with respect to the Commission’s administration of the federal securities laws, it would not prevent other parties from asserting that a crypto asset remains subject to an investment contract (or is otherwise a security), which may limit the utility of the safe harbor.

Preemption of State Registration and Qualification Requirements

To address the costs and burdens of potentially duplicative state regulation, Regulation Crypto Assets would add a “qualified purchaser” definition under the Securities Act and thereby preempt state securities law registration and qualification requirements for offers and sales of covered investment contracts made under the exemptions described above. For secondary market transactions by persons other than an issuer, underwriter, or dealer, the proposed amendments would similarly preempt state registration and qualification requirements for covered investment contracts initially sold under a Regulation Crypto Assets exemption or another federal exemption. That preemption would continue for as long as the issuer satisfies the applicable information, filing, and periodic reporting requirements under Regulation Crypto Assets.

Unrestricted Securities

Notably, covered investment contracts issued under either exemption would not be restricted securities and would not be subject to Rule 144-style holding periods or resale limitations. This is a departure from Regulation D and Regulation Crowdfunding, which reflects the Commission’s view that free tradability supports the network effects that often drive the value of a crypto asset.

Bad Actor Disqualifications and Investment Companies

The availability of the Startup Exemption and the Fundraising Exemption would be conditioned on the issuer and certain other related persons and insiders not being disqualified persons as defined in Regulation A. Both the disqualifying actions and events, as well as the related exceptions, would apply to both exemptions. In addition, neither exemption would be available to an issuer that is registered or required to be registered as an investment company or a business development company. As a result, issuers considering making offerings of interests in pooled investment vehicles would need to carefully consider investment company status issues prior to relying on either exemption.

Next Steps

Regulation Crypto Assets would provide meaningful relief for the sponsors of many crypto projects and enterprises, along with important clarity for issuers, investors, and other market participants that have long struggled with determining when a crypto asset ceases to be subject to an investment contract. The SEC’s proposal is nonetheless targeted at smaller, non-registered offerings and would not provide a permanent market structure framework that the CLARITY Act would provide. Importantly, in his statement supporting the proposal, SEC Chairman Atkins remained steadfast in his belief that Regulation Crypto Assets should not be viewed as a substitute for legislation: “legislation remains indispensable to enacting ‘future-proofed’ rules of the road that are durable enough to protect the work we are undertaking today from being unwound by a future rogue regulator.” This dynamic will likely come into sharper focus when the U.S. Senate returns from its August recess. 

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