On Aug. 18, the Securities and Exchange Commission (SEC) proposed a sheaf of rules it called Regulation Crypto Assets, which would let crypto projects raise up to $75 million in capital per year without registering the offering as they’d have to do if they were issuing stock as regulated public businesses. That new policy dovetails with an earlier piece of regulatory interpretation of the existing laws published in March by the SEC and the Commodity Futures Trading Commission (CFTC), which categorized 18 of the leading cryptocurrencies as digital commodities rather than securities. The newly proposed SEC crypto rulebook is intended to cover everything that wasn’t handled by that first stab earlier in the year, and it’s an attempt to create a sensible framework for crypto regulation in the event that the Clarity Act fails to be voted into law later this year.
As sweeping as media accounts of the proposed package make it sound, for holders of leading coins like Bitcoin, XRP, Cardano, and even Dogecoin, the rules are unlikely to change much if they’re implemented in their current form. But for Ethereum (ETH +1.18%) and Solana (SOL +0.36%), among others, the implications could be substantial, albeit indirect, so let’s unpack what investors need to know here.
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Raising capital via crypto could become a lot less legally hazardous soon
The proposal creates two paths for crypto projects to avoid full securities registration, such as a start-up would need to do if it planned on going public or a business would need to do in order to issue new stock.
The proposed start-up exemption would allow one raise of up to $5 million over a four-year period, which would be disclosed on the project’s own website instead of being filed with a regulator. No filings of financial statements would be required, either. A separate tiered fundraising exemption would allow for $20 million per year in unaudited fundraising at Tier 1 and $75 million with financial auditing at Tier 2, both with continuing reporting requirements.
So the gist of it is that there would be a framework ramping up the level of scrutiny and the reporting requirements along with the scale of the businesses involved and their demands for capital.
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Another provision would allow crypto projects to reduce their regulatory burden after meeting certain requirements, even if they were subject to one of the more stringent tiers described above. Once an asset issuer finishes or permanently abandons the managerial efforts it promised to its investors, the legal construct specifying that a sale of tokens is a securities transaction would no longer apply.
This could affect chains with big ecosystems the most
The synthesis of these proposed rules is that before launching, a newly formed crypto company could publish a whitepaper-grade disclosure on its website instead of a full prospectus for investors, and then later leave behind its securities status on a timetable it controls. The bar to legally launching, operating, and winding down crypto businesses would be lower than for public companies, but more importantly, the bar would be entirely visible to everyone from the start, unlike before.
Solana and Ethereum, two major loci of new crypto project formation, stand to benefit the most in the long run from this new paradigm — if the proposals are actually implemented.
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More launches on Ethereum or Solana mean more on-chain activity, more capital flowing to the chain, and more available talent, too. Nonetheless, having a busy chain and having an increasingly valuable token are two very different things, and for neither of those coins is there currently a strong link between the degree of on-chain activity and the returns experienced by holders.
Another key detail is that the fundraising tiers are somewhat modest relative to real historical fundraising rounds. For example, the lending protocol Morpho raised $175 million in one round this June, well past Tier 2’s limit in the proposal. For the emerging projects that are easily able to raise large volumes of capital, there probably won’t be much in the way of relief from reporting requirements.
That said, recognize that this is a proposal, not a real rule, and certainly not a legal construct with the force of an actual law.
There will be a 60-day public commenting period after the Federal Register publishes the proposals in detail, after which the drafting process may take months. Keep an eye on the language coming out of the CFTC and SEC after that period ends — it’ll explain how they see the details in the finalized set of rules, assuming those rules keep moving forward.
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