Author: Alex Thorn, Head of Research at Galaxy
Compiled by: Jiahua, ChainCatcher
On August 18, the U.S. Securities and Exchange Commission (SEC) proposed the Regulation on Crypto Assets (hereinafter referred to as “Reg Crypto”). This is the first set of securities rules in the United States specifically designed for the issuance and sale of crypto assets, rather than simply applying existing corporate stock rules to crypto assets.
The proposal will first provide a legal path for certain tokens to be sold to the U.S. public, allowing non-accredited investors to participate without a registered offering. Second, it will establish a formal mechanism with clear timelines that allows investment contracts associated with tokens to terminate.
For the past decade, U.S. token issuers have essentially faced two choices: either conduct a registered offering (which very few projects can accomplish in reality) or opt for overseas issuance. Reg Crypto provides a third option, while also offering an exit path for thousands of tokens that are already trading but whose legal status remains unclear.
This rule applies only to crypto assets that are not securities in themselves, but whose issuance or sale constitutes part of an investment contract, and for which the issuer has committed to building a product, network, or ecosystem through that contract.
Tokenized stocks and bonds, as well as arrangements that tie tokens to equity or other securities, are explicitly excluded from this framework. Within this scope, the proposal is divided into four phases: raise, disclose, build, and exit.
Four Phases: Raise, Disclose, Build, and Exit
Raise: A one-time financing exemption for startups will allow issuers to raise up to $5 million within a maximum of four years, with public filing submissions at the start and end of the period. A larger exemption designed 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) will permit issuers to raise up to $20 million or $75 million within 12 months, depending on their tier level.
To apply for this financing exemption, SEC qualification approval is required, along with ongoing reporting and financial statement submissions. Larger tier-level offerings will also require audited financial statements, and the issuer must maintain a substantial connection with the U.S. in terms of organization, management, and assets.Disclose: Issuers need to provide information tailored specifically for the token, including token supply and release plans, minting and burning mechanisms, governance mechanisms and smart contract permissions, source code, and most importantly: what the issuer commits to building and the current status of that construction.
Build: The startup exemption will provide a window of up to four years for issuers to complete their core committed construction work.
Exit: Once the issuer completes or permanently halts the aforementioned work and makes no new commitments to undertake such work, and submits a transition report, the relevant investment contracts will be deemed terminated. Thereafter, the SEC will no longer regard the crypto asset as an asset bound by that investment contract under the Securities Act and the Securities Exchange Act.
It is noteworthy that this safe harbor mechanism also applies to issuers that do not use the above financing exemption mechanisms. This means it affects not only future token issuances but also provides a potential exit path for tokens issued years ago, whose securities status remains unclear.
From the SEC's estimation of the applicable scale, the impact of this rule will be more apparent. To estimate the related paperwork volume, the SEC assumes that roughly 475 issuers will use the investment contract safe harbor mechanism annually, while about 130 projects will launch issuances through the two new exemptions each year. This means that in the short term, Reg Crypto is more likely to address the legal status issues of existing assets under securities law rather than immediately trigger a new wave of token issuances.
Investment contracts sold under any of the above exemptions will not be considered restricted securities; if there are no contractual restrictions otherwise, they can be immediately resold. The proposal will also give priority to certain state registration and qualification requirements, covering eligible initial issuances and some secondary trading, provided that the issuer continues to fulfill the relevant obligations.
However, this rule does not involve exchanges, brokers, dealers, or custodial businesses, nor is it similar to another innovative exemption discussed by the SEC regarding tokenized securities and on-chain trading. The public comment period will last for 60 days after the proposal is published in the Federal Register.
The SEC canceled the public meeting originally scheduled for August 14 and released the proposal four days later. Three current commissioners—Chairman Paul Atkins, and commissioners Hester Peirce and Mark Uyeda all issued statements of support. Although the comment period is 60 days, the timeline for formal adoption before 2027 remains quite urgent.
Our View
As we wrote last week, despite the Senate being stalled on the CLARITY Act, the SEC under Atkins's leadership is moving forward with initiatives that could enhance regulatory clarity in the crypto industry.
Reg Crypto represents a constructive step and one of the clearest signals so far: the SEC is not prepared to wait for Congress to modernize its own regulatory framework. This disclosure system is the most obvious reflection of the SEC beginning to understand the uniqueness of crypto assets. It requires issuers to disclose token supply and release plans, minting and burning mechanisms, smart contract permissions, source code links, ecosystem structure, and the ongoing documentation of what the issuer commits to building and the current progress.
These are the real concerns for token buyers, and they differ from the information that equity investors in companies care about. The SEC is recognizing something it refused to acknowledge during the tenure of Atkins's predecessor, Gary Gensler: that there are distinctions in form and function between token issuances and equity issuances, and therefore the disclosures investors need should also differ.
The proposal's recognition of "time" is also significant. After a stock issuance, its securities character persists for an extended period. Under the Reg Crypto framework, investment contracts associated with tokens can bind the issuer's obligations from the time of issuance during the project construction period and terminate on a publicly recorded date, even if the tokens themselves still exist and continue to trade.
This is not just a new exemption but a regulatory framework built around the token lifecycle that has been translated into enforceable rules. Whether issuers will adopt these financing exemption mechanisms remains an open question.
Regulation D (Regulation D is a private placement exemption rule under U.S. securities offerings that allows companies to raise funds from qualified investors without requiring public registration) Rule 506 remains in effect, with no financing limits, no SEC qualification approval required, and no ongoing public reporting obligations. In contrast, Reg Crypto's advantage is that it allows for legal public offerings to non-accredited investors, with related securities being immediately transferable and prioritizing some state registration requirements.
For projects that want tokens to circulate rather than remain trapped in venture capital holdings for a long time, the absence of federal holding periods may be the most underestimated term in the entire proposal. Of course, the trade-off is that issuers must take on real disclosure and reporting obligations; if they opt for larger financing exemptions, they must also maintain a substantial connection with the U.S.
This requirement brings another challenge. In the past, many token projects chose to establish offshore foundations, not just to evade U.S. securities laws, but also for reasons related to governance, capital management, and tax treatment.
The larger financing exemptions in Reg Crypto require many projects to substantively relocate their issuance entities, management, operations, and most assets back to the U.S. Before the U.S. tax treatment of token sale revenues and fund allocations is made clearer, this requirement may be enough to force many projects to maintain their existing structures.
The startup exemption does not have similar U.S. registration requirements, so even though its financing cap is only $5 million, it may achieve higher adoption rates at the early stage. If these issues can be actively resolved, the most noteworthy situation would be a truly legitimate token financing 2.0.
One of the early important applications in the crypto industry is capital formation: project teams can raise funds directly from future users instead of relying entirely on venture capital firms and traditional private financing systems. The 2017 token financing cycle not only demonstrated market demand for the initial coin offering model but also showcased the consequences of adopting this model in the absence of credible disclosures, investor protections, and enforceable rules.
Reg Crypto fills many key gaps that were missing back then: exemption mechanisms designed for different financing scales; information disclosure requirements tailored to the characteristics of tokens; allowing public investor participation under limit restrictions; and clear termination time frames for issuers’ obligations under securities law.
This system may also foster new service ecosystems. Securities lawyers, auditing firms, technical disclosure service providers, issuance platforms, and compliance service agencies will benefit by helping projects prepare issuance materials and transition reports, just as Regulation A+ spawned its own associated service industry.
The teams most likely to adopt this framework first are those that already have U.S. entities, clearer organizational structures, and can afford ongoing disclosure costs. The SEC estimates that preparing a transition report under the independent safe harbor mechanism would typically require about 30 hours of work, including costs for external professional services. This means that even completing the “exit” process is rarely something that the project teams can achieve on their own.
However, in the short term, “exit” is more important than “raise.”
The most obvious impact of Reg Crypto is more likely to be the cleanup of historical lingering tokens, rather than driving a resurgence of U.S. token issuance. This, in itself, is significant: for many years, the market has tried to infer when investment contracts actually terminate through regulatory speeches, settlement agreements, and litigation cases.
Previously, the industry hoped for the standard of “sufficient decentralization,” meaning that when a blockchain network is no longer controlled by a single entity and the token value is no longer primarily dependent on the issuer’s efforts, it could fall outside the scope of securities regulation. But this standard has always lacked a clear definition and has become a long-term uncertainty in U.S. crypto regulation.
Reg Crypto will replace this vague status with formal filings and clear dates. However, it is important to note that the rule is still in proposal stage and not an official rule. Even if it is ultimately adopted, the system itself may still undergo changes. The SEC’s proposal is currently subject to a 60-day public comment process.
Atkins stated in his statement that legislation remains essential, as only Congressional action can prevent future regulators from overturning the framework currently established by the SEC. This assessment is reasonable given that this system may indeed undergo adjustments in the future.
Moreover, state regulators may challenge the broad federal prioritization clauses in the proposal. Reg Crypto may bring significant regulatory clarity to the crypto industry, but only Congress can ensure that such clarity lasts long-term.
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