Author: Alex Thorn, Head of Research, Galaxy Research
Compiled by: Jiahuan, ChainCatcher
On August 18, the U.S. Securities and Exchange Commission (SEC) proposed the "Regulation of Crypto Assets" (hereinafter referred to as "Reg Crypto"). This is the first set of securities rules in the United States specifically designed around the offering and sale of crypto assets, rather than simply applying existing rules formulated for corporate stocks to crypto assets.
This proposal first provides a legal pathway for certain tokens to be sold to the U.S. public, including allowing participation by non-accredited investors without requiring a registered offering. Second, it establishes a formal mechanism with clear timelines for terminating investment contracts associated with tokens.
Over the past decade, token issuers in the U.S. have effectively faced two choices: either conduct a registered offering (which very few projects have managed to complete in reality) or choose to launch overseas. Reg Crypto offers a third option and also provides an exit path for the thousands of tokens already trading but whose legal status remains unclear.
The rule only applies to crypto assets that are not securities in themselves, but whose offering or sale is part of an investment contract, and where the issuer has promised through that contract to build a product, network, or ecosystem.
Tokenized stocks and bonds, as well as arrangements that link tokens to equity or other securities, are explicitly excluded from this framework. Within this scope, the proposal is divided into four phases: Raise, Disclosure, Build, and Exit.
Four Phases: Raise, Disclosure, Build, and Exit
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Raise: A one-time financing exemption for startups will allow issuers to raise up to $5 million over a maximum period of four years, with public filings required at the beginning and end of that period. Another, larger-scale exemption based on Regulation A (a public offering exemption mechanism under U.S. securities law that allows companies to raise funds from the public after meeting disclosure requirements) allows issuers to raise up to $20 million or $75 million within 12 months, depending on the tier.
Using this financing exemption requires SEC qualification approval and ongoing submission of reports and financial statements. Larger Tier 2 offerings also require audited financial statements, and the issuer must maintain a substantial connection with the United States in terms of organization, management, and assets. -
Disclose: Issuers need to provide information specifically designed for tokens, including token supply and release schedule, minting and burning mechanisms, governance mechanisms and smart contract permissions, source code, and most importantly: what the issuer promises to build and the current progress of that build.
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Build: The startup exemption provides a window of up to four years for issuers to complete their promised core development work.
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Exit: Once the issuer completes or permanently ceases the aforementioned work, makes no new promises to undertake such work, and files a transition report, the relevant investment contract will be deemed terminated. Thereafter, the SEC will no longer consider that crypto asset as an asset subject to that investment contract under the Securities Act and the Securities Exchange Act.
Notably, this safe harbor mechanism also applies to issuers who did not use the aforementioned financing exemptions. This means it not only impacts future token offerings but also provides a potential exit path for tokens issued years ago whose security status remains undefined.
The rule's impact becomes more intuitive from the SEC's estimates of its applicable scale. To estimate the paperwork burden, the SEC assumes about 475 issuers per year would use the investment contract safe harbor mechanism, while about 130 projects per year would conduct offerings under the two new exemptions. This suggests that in the short term, Reg Crypto is more likely to address the legal status of existing assets under securities law rather than immediately sparking a new wave of token offerings.
Investment contracts sold under either of the above exemptions will not be considered restricted securities; they can be resold immediately unless contractually restricted. The proposal will also have preemptive effect over certain state registration and qualification review requirements, covering eligible initial offerings and some secondary trading, provided the issuer continues to fulfill its obligations.
However, the rule does not address exchanges, brokers, dealers, or custodial businesses, nor is it the same as another innovation exemption previously discussed by the SEC for tokenized securities and on-chain trading. The public comment period will last 60 days after the proposal is published in the Federal Register.
The SEC canceled a public meeting originally scheduled for August 14 and released the proposal four days later. Three current commissioners—Chair Paul Atkins and Commissioners Hester Peirce and Mark Uyeda—issued statements of support. Although the comment period is 60 days, the timeline remains very tight if formal adoption is to occur before 2027.
Our View
As we wrote last week, despite the continued stalemate in the Senate over the CLARITY Act, the SEC under Chair Atkins is moving forward with measures that can increase regulatory clarity for the crypto industry.
Reg Crypto is a constructive step and one of the clearest signals to date that the SEC is not prepared to wait for Congress to modernize its own regulatory system. This disclosure regime is the most obvious manifestation of the SEC beginning to understand the uniqueness of crypto assets. It requires issuers to disclose token supply and release schedule, minting and burning mechanisms, smart contract permissions, source code links, ecosystem structure, and to continuously record what the issuer promises to build and the current progress.
This is the information token buyers actually care about, and it differs from what equity investors in a company focus on. The SEC is acknowledging something it refused to acknowledge during the tenure of Atkins' predecessor, Gary Gensler: token offerings differ from equity offerings in form and function, and therefore the required disclosures for investors should also differ.
The proposal's understanding of "time" is equally important. After a stock offering, its security nature persists. Under the Reg Crypto framework, an investment contract associated with a token can begin at issuance, bind the issuer's obligations during the project build phase, and terminate on a publicly recorded date, even if the token itself continues to exist and trade.
This is not just a new exemption; it is a regulatory framework built around the token lifecycle and translated into enforceable rules. Whether issuers will adopt these financing exemptions remains an open question.
Rule 506 under Regulation D (Regulation D is a private placement exemption rule under U.S. securities law that allows companies to raise funds from qualified investors without public registration) remains valid; it has no fundraising cap, does not require SEC qualification approval, and has no ongoing public reporting requirements. In comparison, the advantages of Reg Crypto are that it allows legal public offerings to non-accredited investors, the securities can be transferred immediately, and it has preemptive effect over certain state registration requirements.
For projects that want their tokens to circulate, rather than remain in venture capital portfolios long-term, the lack of a federal holding period might be the most underrated provision in the entire proposal. Of course, the trade-off is that issuers must undertake real disclosure and reporting obligations; if using the larger financing exemption, they must also maintain a substantial connection with the U.S.
This requirement presents another test. In the past, many token projects chose to establish offshore foundations not only to circumvent U.S. securities laws but also for reasons related to governance, treasury management, and tax treatment.
The larger financing exemption in Reg Crypto requires many projects to substantially relocate their issuing entity, management, business operations, and a majority of assets back to the U.S. Until U.S. tax treatment of token sale proceeds and treasury allocations becomes clearer, this requirement may be enough for many projects to maintain their existing structures.
The startup exemption does not have similar U.S. incorporation requirements, so despite its $5 million fundraising cap, it may see higher adoption in early stages for this reason. If these issues can be resolved positively, the most noteworthy scenario would be a truly legal Token Financing 2.0.
One of the important early applications of the crypto industry was capital formation: projects could raise funds directly from future users, rather than relying entirely on venture capital firms and traditional private financing systems. The 2017 token financing cycle demonstrated both the market's demand for the ICO model and the consequences of adopting it without credible disclosure, investor protection, and enforceable rules.
Reg Crypto fills in many of the key missing elements from that era: exemption mechanisms designed for different fundraising scales; disclosure requirements tailored to token characteristics; allowance for public investor participation within limits; and a clear endpoint for when the issuer's securities law obligations terminate.
This system could also foster new service ecosystems. Securities lawyers, audit firms, technical disclosure service providers, issuance platforms, and compliance service providers will all benefit from helping projects prepare offering materials and transition reports, much like Regulation A+ spawned its own ancillary industry.
The teams most likely to adopt this framework first are those that already have U.S. entities, relatively clear organizational structures, and can bear the ongoing disclosure costs. The SEC estimates that preparing a transition report under the standalone safe harbor mechanism requires an average of about 30 hours of effort, including external professional service costs. This means even just completing the "Exit" process can rarely be done entirely by the project team itself.
However, in the short term, "Exit" is more important than "Raise."
The most immediate and obvious impact of Reg Crypto is more likely to be cleaning up legacy tokens rather than reviving U.S. token offerings. This in itself is significant: for many years, the market has been trying to infer when an investment contract terminates through regulatory speeches, settlement agreements, and litigation cases.
Previously, the industry pinned its hopes on the "sufficient decentralization" standard, i.e., when a blockchain network is no longer controlled by a single entity and token value no longer primarily depends on the issuer's efforts, it may fall outside securities regulation. But this standard has always lacked clear definition and has been a long-term source of uncertainty in past U.S. crypto regulation.
Reg Crypto would replace this vague status with formal filings and clear dates. But note that the rule is currently in the proposal stage, not a final rule. Even if ultimately adopted, the system itself may still face changes. This SEC proposal currently still needs to go through a 60-day public comment process.
In his own statement, Chair Atkins indicated that legislation remains indispensable; only congressional action can prevent future regulators from overturning the framework the SEC is currently establishing. Considering this system could indeed be adjusted in the future, this judgment is reasonable.
Additionally, state regulators may challenge the proposal's broad federal preemption provisions. Reg Crypto may bring important regulatory clarity to the crypto industry, but only Congress can make that clarity truly lasting.
