Author: Alex Thorn, Head of Research at 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 U.S. securities rules specifically designed for the offering and sale of crypto assets, rather than simply applying existing rules created for corporate stocks to crypto assets.
The proposal first provides a legal pathway for the sale of certain tokens to the U.S. public, including allowing non-accredited investors to participate without requiring a registered offering. Second, it establishes a formal mechanism with clear timelines for terminating investment contracts related to tokens.
Over the past decade, U.S. token issuers have effectively faced two choices: either register their offering (though virtually no projects have been able to complete this in practice), or opt to issue abroad. Reg Crypto offers a third option, while also providing an exit path for thousands of tokens already in trading but with unclear legal status.
This rule applies only to a cryptocurrency asset that is not itself a security, but whose offering or sale constitutes part of an investment contract, and for which the issuer previously 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 stages: fundraising, disclosure, development, and exit.
Four stages: fundraising, disclosure, building, and exit
Raise: A one-time fundraising exemption for startups would 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 exemption based on Regulation A (a public offering exemption under U.S. securities law that allows companies to raise funds from the public after meeting disclosure requirements) permits issuers to raise up to $20 million or $75 million within 12 months, depending on their tier.
To qualify for this financing exemption, SEC accreditation is required, along with ongoing reporting and submission of financial statements. Larger Tier 2 offerings also require audited financial statements, and the issuer must maintain a substantial connection to the United States in terms of organization, management, and assets.Disclosure: The issuer must provide specific information about the token, including token supply and release schedule, minting and burning mechanisms, governance structure and smart contract permissions, source code, and most importantly: what the issuer commits to building and the current progress of that development.
Build: The startup exemption will provide a window of up to four years for issuers to complete their promised core building work.
Exit: Once the issuer completes or permanently ceases the above activities, makes no new commitments to undertake such activities, and submits a transition report, the relevant investment contract shall be deemed terminated. Thereafter, the SEC will no longer consider the cryptocurrency asset to be subject to the investment contract under the Securities Act and the Securities Exchange Act.
It is worth noting that this safe harbor mechanism also applies to issuers who have not used the above financing exemptions. This means it not only impacts future token offerings but also provides a potential exit path for tokens issued many years ago whose securities status remains unclear.
From the SEC’s estimation of the scope of applicability, the impact of this rule becomes more apparent. To estimate the associated paperwork burden, the SEC assumes that approximately 475 issuers per year will use the investment contract safe harbor, and about 130 offerings per year will utilize 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 laws than to immediately trigger a wave of new token offerings.
Investment contracts sold under any of the above exemptions will not be considered restricted securities and may be resold immediately unless otherwise restricted by the contract. The proposal will also take precedence over certain state registration and qualification requirements, covering eligible primary offerings and some secondary transactions, provided the issuer continues to fulfill its ongoing obligations.
However, this rule does not cover exchanges, brokers, dealers, or custodial services, and it differs from another proposed exemption previously discussed by the SEC regarding tokenized securities and on-chain transactions. The public comment period will last 60 days after the proposal is published in the Federal Register.
The SEC canceled its previously scheduled public meeting on August 14 and released the proposal four days later. All three current commissioners—Chair Paul Atkins, and Commissioners Hester Peirce and Mark Uyeda—issued statements expressing support. Although the comment period is 60 days, this timeline remains tight if the rule is to be formally adopted before 2027.
Our perspective
As we wrote last week here, despite the Senate remaining stalled on the CLARITY Act, the SEC under Atkins continues to advance measures that can enhance regulatory clarity for the crypto industry.
Reg Crypto is a constructive step and one of the clearest signals yet: the SEC is not prepared to wait for Congress to drive modernization of its own regulatory framework. This disclosure regime represents the most evident sign that the SEC is beginning to understand the unique characteristics of crypto assets. It requires issuers to disclose token supply and release schedules, minting and burning mechanisms, smart contract permissions, source code links, ecosystem structure, and ongoing documentation of what the issuer commits to building and the current progress.
These are the details that token buyers truly care about, and they differ from what equity investors prioritize. The SEC is acknowledging something it refused to recognize during Gary Gensler’s tenure as Atkins’s predecessor: token offerings differ from equity offerings in form and function, and therefore require distinct disclosures for investors.
The proposal’s understanding of “time” is equally important. After a stock is issued, its security characteristics persist indefinitely. Under the Reg Crypto framework, an investment contract associated with a token can begin at the time of issuance, bind the issuer’s obligations during the project’s development 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, but a regulatory framework built around the token lifecycle, translated into enforceable rules. Whether issuers will adopt these financing exemptions remains an open question.
Rule 506 under Regulation D remains in effect: it has no cap on fundraising, does not require SEC qualification, and imposes no ongoing public reporting requirements. In contrast, Reg Crypto offers the advantage of permitting legal public offerings to non-accredited investors, allowing immediate transfer of the related securities, and providing priority over certain state registration requirements.
For projects that want their tokens to actually circulate rather than remain long-term holdings of venture capital firms, the absence of a federal holding period may be the most underappreciated provision in the entire proposal. Of course, the cost is that issuers must assume genuine disclosure and reporting obligations; if using a larger-scale financing exemption, they must also maintain a substantial connection with the United States.
This requirement presents another challenge. In the past, many token projects chose to establish offshore foundations not only to avoid U.S. securities laws but also due to factors such as governance, fund management, and tax considerations.
Reg Crypto’s larger funding exemptions require many projects to substantially relocate their issuing entity, management, business operations, and the majority of their assets back to the United States. Until the U.S. tax treatment of token sales proceeds and treasury allocations becomes clearer, this requirement may be sufficient to keep many projects maintaining their existing structures.
Startup exemptions, however, do not have similar U.S. registration requirements, so despite their $5 million funding cap, they may achieve higher adoption in early stages. If these issues are positively addressed, the most noteworthy scenario would be a truly legitimate token financing 2.0.
One of the early key applications in the crypto industry was capital formation: project teams could raise funds directly from future users, rather than relying entirely on venture capital firms and traditional private financing systems. The 2017 token fundraising cycle demonstrated both the market’s demand for the initial coin offering model and the consequences of adopting this model without credible disclosures, investor protections, or enforceable rules.
Reg Crypto filled in many critical elements missing at the time: exemption mechanisms tailored to different funding sizes; disclosure requirements based on token characteristics; allowing public investors to participate within set limits; and clearly defining the point at which the issuer’s securities law obligations terminate.
This system may also give rise to a new ecosystem of services. Securities lawyers, auditing firms, technical disclosure providers, issuance platforms, and compliance service providers will all benefit by helping projects prepare offering materials and transition reports, just as Regulation A+ spawned its own ecosystem of supporting services.
The teams most likely to adopt this framework first are those that already have a U.S. entity, a well-defined organizational structure, and the ability to bear ongoing disclosure costs. The SEC estimates that preparing a transition report under the independent safe harbor mechanism requires an average of approximately 30 labor hours, including costs for external professional services. This means that even completing the "exit" process is rarely feasible entirely on the project team’s own.
However, in the short term, "exit" is more important than "fundraising".
The most immediate impact of Reg Crypto is more likely to be the cleanup of legacy tokens rather than a resurgence of token issuance in the U.S. This in itself is significant: for years, the market has been trying to infer when an investment contract ends, based on regulatory statements, settlement agreements, and litigation cases.
Previously, the industry had hoped that the standard of "full decentralization"—where a blockchain network is no longer controlled by a single entity and the token's value is no longer primarily dependent on the efforts of its issuer—could exempt it from securities regulation. However, this standard has always lacked clear definition, remaining a long-standing source of uncertainty in U.S. crypto regulation.
Reg Crypto will replace the previous ambiguity with formal filing requirements and clear dates. However, note that this rule is currently in the proposal stage, not yet a formal rule. Even if ultimately adopted, the framework itself may still undergo changes. The SEC’s current proposal must still go through a 60-day public comment period.
Atkins stated in his statement that legislation remains essential, and only through congressional action can future regulators be prevented from overturning the framework currently established by the SEC. Given that this system may indeed be adjusted in the future, this assessment is reasonable.
In addition, state regulators may also challenge the broad federal preemption provisions in the proposal. Reg Crypto may bring important regulatory clarity to the crypto industry, but only Congress can make this clarity truly lasting.