SEC Proposes Long-Awaited Regulation for Primary Token Issuance

This article originally appeared in Galaxy Research's weekly newsletter. Subscribe to get timely insights delivered to your inbox every Friday morning.

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.

Scale helps frame the likely impact. For paperwork-estimation purposes, the SEC assumes approximately 475 issuers a year would use the investment-contract safe harbor, compared with 130 annual offerings under the two new exemptions. That suggests the near-term effect may be to resolve the securities-law status of existing assets rather than unleash a wave of new issuance. Covered investment contracts sold under either exemption would not be restricted securities and, absent a contractual limitation, could be resold immediately.

The proposal would also preempt state registration and qualification requirements for covered primary offerings and certain secondary transactions while the issuer remains current with its obligations. It does not address exchanges, brokers, dealers, or custody, and it is not the separate innovation exemption the SEC has discussed for tokenized securities and onchain trading. Comments are due 60 days after Federal Register publication. The SEC canceled its scheduled Aug. 14 open meeting and released the proposal four days later. All three sitting commissioners - Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda - issued supportive statements. While comments are due in 60 days, adoption before 2027 would be a fast timetable.

OUR TAKE

As we wrote last week, Atkins’ SEC is moving forward with some regulatory clarity for crypto even while the Senate remains stalled on the CLARITY Act. Reg Crypto is a constructive step, and one of the clearest signs yet that the SEC is not waiting for Congress to modernize its own rulebook.

The disclosure regime is the clearest evidence that the Commission understands the assignment. It asks for supply and release schedules, mint-and-burn mechanics, smart-contract permissions, a source-code link, the structure of the ecosystem, and a running account of what the issuer promised to build and how far along it is. These are the facts that matter to a token buyer, and they are not the same facts that matter to a buyer of corporate equity. The Commission is recognizing something it refused to recognize under Atkins’ predecessor, Gary Gensler: a token issuance differs from an equity issuance in both form and function, and the disclosure investors need should differ accordingly.

The proposal makes an equally important recognition about time. Equity is permanently a security. Under Reg Crypto, the investment contract associated with a token can begin at issuance, govern the issuer's obligations while the project is being built, and then end on a publicly recorded date even though the token continues to exist and trade. That is more than a new exemption. It is a workable theory of the token lifecycle, translated into an administrable rule.

Whether issuers will use the fundraising exemptions is the open question. Rule 506 under Regulation D remains available with no offering cap, no SEC qualification process, and no ongoing public-reporting regime. Against that, Reg Crypto offers lawful public distribution to non-accredited buyers, unrestricted securities that can be transferred immediately, and preemption of state registration requirements. For a project that wants its token to circulate rather than sit in venture capital investors' wallets, the absence of a federal holding period may be the most underrated provision in the entire proposal. The price is a real disclosure and reporting burden and, for the larger exemption, a substantial U.S. nexus.

That last condition creates another test. Token projects have frequently used offshore foundations for reasons extending beyond U.S. securities law, including governance, treasury management, and tax treatment. The larger Reg Crypto exemption asks many of those projects to bring the issuer, management, business administration, and a majority of assets substantially onshore. Until the U.S. tax treatment of token-sale proceeds and treasury allocations becomes clearer, that requirement may be enough to preserve existing structures. The startup exemption has no equivalent U.S.-incorporation requirement and could see disproportionate early uptake for that reason alone, despite its $5m ceiling.

If those questions resolve favorably, the interesting scenario is an ICO 2.0 that is actually legal. One of crypto's early use cases was capital formation: allowing projects to raise money from their prospective users rather than relying exclusively on venture investors and traditional placement infrastructure. The 2017 cycle demonstrated both the demand for the initial coin offering model and the consequences of attempting it without credible disclosures, investor protections, or enforceable rules. Reg Crypto supplies much of what was missing: exemptions sized for different raises, disclosure written for the asset, lawful retail participation within a cap, and a defined endpoint for the issuer's securities-law obligations.

A new services layer would almost certainly emerge around it. Securities lawyers, auditors, technical-disclosure specialists, launchpads, and compliance providers would all benefit from helping projects prepare offering materials and transition reports, much as Regulation A+ produced its own cottage industry. The likely first movers are teams that already have U.S. entities, relatively clean organizational structures, and the resources to absorb the reporting burden. The SEC estimates that a transition report under the standalone safe harbor would require an average of 30 burden hours, including outside professional services, which suggests that even the "exit" will rarely be a do-it-yourself filing.

In the near term, however, the exit matters more than the raise. The first visible effect of Reg Crypto is more likely to be a cleanup of legacy tokens than a resurgence in U.S. token sales. That alone would be significant: the market has spent years trying to infer from speeches, settlements, and litigation when an investment contract ends. (Remember “sufficiently decentralized”?) Reg Crypto would replace that ambiguity with a filing and a date.

But this remains a proposal, not a rule, and even an adopted rule would remain vulnerable. Atkins used his own statement to argue that legislation is indispensable to prevent a future regulator from unwinding the SEC's work, which is an accurate assessment of how reversible this regime would be. State regulators may also challenge the proposal's broad preemption provisions.

Reg Crypto could provide meaningful regulatory clarity, but only Congress can make that clarity durable.