Regulation Crypto: Huge Leap Forward, but Almost Certainly Not the Final Word

Congress has yet to enact long-awaited crypto market reform. Nevertheless, on August 18, 2026, the Securities and Exchange Commission (SEC) issued its widely anticipated proposing release for “Regulation Crypto Assets,” which would include two exemptions and a safe harbor for offering certain crypto assets without registration as securities under the Securities Act of 1933 (Securities Act). The proposing release is part of a broader effort by the SEC to further the goals of the president’s Executive Order 14178 issued early last year, titled “Strengthening American Leadership in Digital Financial Technology,” by providing “regulatory clarity” and “well-defined jurisdictional regulatory boundaries,” in contrast to the regulation by enforcement approach of the prior administration.

The proposing release also builds on ideas exchanged at several roundtables hosted by the SEC last year on facilitating transactions in these assets and on exemptions from registration built into the CLARITY Act bill passed last year in the House of Representatives. Unlike the SEC’s March 2026 interpretive guidance on crypto assets, which provides the SEC’s views on the security status of a wide range of crypto assets, the focus of the proposing release is on that class of crypto assets that would be classified as securities only because they might be subject to investment contracts.

Crypto assets are often distributed to promote, incentivize, and facilitate the development of an associated crypto network or application that is intended ultimately to be functional without centralized control. The SEC identifies the promises and representations made to promote such an offering as potentially constituting an investment contract, and therefore a security, under the traditional test articulated in SEC v. W.J. Howey & Co., which asks whether a scheme involves “an investment of money in a common enterprise with profits to come solely from the efforts of others.” Those promises and representations, however, are intended to be fulfilled within a period of time, after which the crypto asset would no longer constitute a security.

This transitional characteristic of many crypto asset offerings has created a difficult regulatory landscape for entities issuing crypto assets, and the SEC’s proposal, summarized below, goes a long way toward providing a regulatory framework to address this issue and facilitate crypto asset offerings. That said, certain ambiguities remain and other areas of intersection between crypto asset ecosystems and the federal securities laws, some of which are discussed below, have yet to be addressed.

The Startup Exemption

One exemption, referred to in the proposing release as the “startup exemption,” is a time-limited exemption that would provide what the SEC refers to as a “regulatory runway” during which issuers could attempt to fulfill their representations or promises to engage in essential managerial efforts made under investment contracts associated with crypto assets being issued (referred to in the proposing release as “covered investment contracts”), thereby avoiding what the SEC states would be “unduly burdening” to issuers as they engage in this process.

The scope of the startup exemption is quite broad and applies to all crypto asset transactions subject to an investment contract (referred to in the proposing release as “covered transactions”), including capital raising transactions and other offerings of covered investment contracts for using, operating, governing, or securing the network or application associated with those assets. Unlike certain other exempted offerings, for example, those under Regulation Crowdfunding, there is no restriction on resales of the crypto assets subject to those investment contracts. According to the SEC, such a restriction “would likely slow down the diffusion of the underlying crypto asset across potential users and other network participants, thus impeding the issuer’s ability to achieve network effects.” For the same reason, there are also no restrictions on sales to nonaccredited investors or on general solicitation.

Use of a startup exemption would be limited to a single use, extending to all covered transactions in the aggregate up to $5 million that occur during a four-year period starting after the issuer files a notice with the SEC of its intent to rely on the exemption. This offering limit would be adjusted no less than once every five years for inflation. Understanding that the one-time-use requirement could inhibit serial entrepreneurs from engaging in separate crypto projects, the SEC has asked for comment on whether the one-time use should be eliminated or amended in some way, for example, to allow “de minimis” participation in other projects in addition to the project for which the exemption is initially intended.

The four-year period is intended to “provide ... issuers with a reasonable amount of time” to fulfill representations or promises made to engage in the essential managerial efforts described in the covered investment contracts and corresponds to the time frame for the exemption contemplated in the House version of the CLARITY Act. But the startup exemption could end before that four-year period has expired if the issuer files a “transition report,” using a proposed Form TR, self-certifying that this stage has been reached.

Disclosure Requirements

The key requirement for the startup exemption is a comprehensive, principles-based disclosure regime tailored to crypto assets and the “particular facts and circumstances” of each covered investment contract, rather than one based on the existing disclosure frameworks. In proposing this disclosure framework, the SEC mentioned that existing disclosure frameworks potentially could force “ultimately immaterial disclosures while, at the same time, fail[ ] to provide investors consistently with the types of information most important to their investment decisions.” These disclosures would have to be provided no later than the time the issuer files the notice of reliance with the SEC.

These disclosures include:

1. A description of the material terms of the crypto asset being offered, particularly with respect to the issuer’s representations and promises related to its managerial efforts and the issuer’s progress in fulfilling these obligations;
2. Material details regarding the nuts and bolts of an offering, including, among other things, the number of units offered and the price and the intended use of proceeds from the offering;
3. A detailed description of the material aspects of the crypto asset;
4. Conflict-of-interest disclosures, including, among other things, material aspects of the issuer’s management and related persons and whether related persons are subject to transfer or resale restrictions;
5. Material aspects of the architecture, network protocols, and functionality of the crypto network or application associated with the crypto asset, including the issuer’s plan for developing the network or application and its progress toward that plan;
6. Material aspects of the security of the crypto asset and related network or application, and, if the issuer has made publicly available the source code for the associated network or application, the website on which the code is published;
7. Disclosures related to economic aspects of the crypto asset, including, among other things, supply, lockups, related persons’ holdings, mechanisms for generating and destroying crypto assets, and methods to verify the transaction history of the crypto asset;
8. Disclosures related to the governance of the associated crypto network’s or associated crypto application’s governance mechanisms, smart contract governance mechanisms, and permissions;
9. Material aspects of the network of contributors or participants that support and interact with the subject crypto asset and associated crypto network or associated crypto application and information regarding the technology infrastructure; and
10. Material factors, concisely stated, “that make an investment in the offering speculative or risky.”

The disclosure requirements for the startup exemption are not a one-and-done proposition. The proposed rules appear to contemplate amendments addressing, for example, material changes in progress on the development plan and in satisfying the promises or representations constituting the covered investment contract.

The SEC’s proposed rules would require disclosure of those material changes no later than 30 days after the end of the calendar year in which the changes have occurred. Crypto networks can rapidly evolve, however, and, in fact, the SEC has asked for comment on whether this annual frequency is appropriate.

The Fundraising Exemption

The second exemption, referred to in the proposing release as the “fundraising exemption,” is intended for larger raises and is modeled on the “mini-IPO” framework of Regulation A, with two tiers. Tier 1 would permit offerings of up to $20 million in a 12-month period, and Tier 2 would permit offerings of up to $75 million. The fundraising exemption caps the amount that may be offered by selling securityholders affiliated with the issuer at $6 million for Tier 1 and $22.5 million for Tier 2.

The SEC acknowledged that Regulation A provides a “strong foundation” and a “practical starting point” for covered investment contract offerings. However, the agency did not rely on Regulation A for the fundraising exemption, mainly because that regulation imposes limitations in the context of covered investment contract offerings, which the SEC believes are not warranted for crypto offerings given the need for wide crypto asset distribution to facilitate the functionality of the associated crypto application or network.

Because Regulation Crypto Assets and Regulation A provide exemptions from registration, both regulations use the term “offering statement” instead of “registration statement” for the statements required to be filed with the SEC. To be sure, a registration statement registers the securities to be offered or sold, whereas an offering statement does not. Similarly, the exemption from registration explains why the SEC staff merely “qualifies” an offering statement rather than declares it “effective” as it does with registration statements.

Filing Requirements

Under the fundraising exemption, issuers must file an offering statement on new Form 1-CRYPTO, which elicits the same disclosures required under the startup exemption summarized above, plus a discussion of the issuer’s financial condition alongside financial statements. Instead of the full management’s discussion and analysis required under Regulation A, the proposal opts for a narrower financial condition narrative (modeled on Regulation Crowdfunding), reflecting an expectation that issuers will typically be at an earlier stage than Regulation A issuers. The SEC staff must qualify (as explained above) the Form 1-CRYPTO before any sales under the exemption occur; however, testing-the-waters communications are permitted before qualification once the form has been filed.

These prequalification communications, modeled on the analogous Regulation A rule, may not be used to solicit or accept money or other consideration, or any binding or nonbinding commitment from a prospective purchaser. Any written testing-the-waters material must be filed as an exhibit to the Form 1-CRYPTO offering statement. As with other offering communications made under the fundraising exemption, testing-the-waters communications are deemed offers of a security, that is, of the covered investment contract, for purposes of the antifraud provisions of the federal securities laws.

Under the fundraising exemption, both tiers require ongoing annual, semiannual, and current reporting, unlike Regulation A’s Tier 1 offerings, which are exempt from reporting. Issuers that have qualified a Tier 1 or Tier 2 offering must keep investors updated through annual reports on Form 1-KC, semiannual reports on Form 1-SC covering the first six months of each fiscal year, and current reports on Form 1-UC triggered by specified events (due within four business days of the triggering event). These forms are modeled on the analogous Regulation A reporting forms but are tailored to covered investment contract offerings. Consistent with the tiered assurance approach for the initial offering statement discussed above, Tier 2 annual financial statements remain subject to audit, while Tier 1 financial statements (annual or semiannual) need not be audited.

Offering Statement Delivery Requirements

In connection with sales made within 90 calendar days after qualification of the offering statement, the issuer, underwriter, or dealer must generally deliver a copy of the final offering circular (which is that part of the offering statement that provides the narrative disclosures related to the covered investment contract) to each purchaser within two business days of the sale. However, an “access equals delivery” accommodation carried over from Regulation A offers flexibility for complying with this obligation. Instead of direct delivery, the seller may provide a notice to each purchaser that the sale was made under a qualified offering statement.

That notice must include a link to the final offering circular or the offering statement (which includes the circular, together with the discussion of financial condition and required financial statements) on EDGAR, along with contact information for requesting a copy. Preliminary offering circulars used before qualification must disclose that the issuer may satisfy its final delivery obligations electronically in this manner, and, consistent with Regulation A, fully electronic offerings are permitted, provided that issuers and intermediaries otherwise comply with the applicable requirements.

General Solicitation and Nonaccredited Investors

General solicitation and participation by nonaccredited investors would be permitted for both tiers. Nonaccredited investors, however, would be limited to investing 10% of the greater of their annual income or net worth. Issuers may rely on a representation from the purchaser when determining compliance with this investment limitation, provided the issuer does not know at the time of sale that the representation is untrue.

This approach contrasts with private offerings under Securities Act Rule 506(c), which permits general solicitation but is limited to accredited investors and requires issuers to take reasonable steps to verify that all purchasers are accredited investors.

The 10% limitation across both tiers also differs from Regulation A Tier 1 offerings, which are not subject to that cap. The SEC believes that applying the investment limitation to both tiers under the fundraising exemption “would be appropriate in the context of offerings of covered investment contracts” and would enhance investor protection. The agency also noted that issuers intending to engage with nonaccredited investors could still rely on the startup exemption, which does not include an investment limitation.

U.S. Nexus Requirement

Unlike the startup exemption, the fundraising exemption is available only to a U.S.-organized entity with more than 50% of its assets in the U.S., with a majority of its executive officers or directors being U.S. citizens or residents, and with its business administered principally in the U.S. The SEC believes these requirements — which are based on the definition of “foreign private issuer” — could provide additional protection for investors. This U.S. nexus would facilitate the agency’s and investors’ ability to seek recourse against issuers in the event of fraud or other misconduct and provide domestic investors with more easily accessible investment opportunities. Further, the SEC noted that this proposed requirement could help reverse the trend of crypto asset projects moving overseas due to regulatory uncertainty in the United States.

Ultimately, the fundraising exemption responds to concerns that Regulation D, Regulation A, and Regulation Crowdfunding restrict resales, cap eligible retail purchasers, or otherwise impede the network effects on which a project’s success often depends. Also, for the sake of those network effects, the fundraising exemption does not treat covered investment contracts as restricted securities nor curtail retail sales as a general matter.

Investment Contract Safe Harbor

The purpose of the safe harbor, referred to in the proposing release as the “investment contract safe harbor,” is twofold. First, it would provide notice to investors that a crypto asset that was subject to a covered investment contract is no longer subject to the same investment contract. Second, it would exempt the issuer of the crypto asset from the registration and reporting requirements of the federal securities laws. Regardless of whether an issuer has utilized the startup exemption or the fundraising exemption, the investment contract safe harbor would be available if its conditions are satisfied.

Upon satisfaction of the conditions, the SEC would deem that a covered investment contract has ceased to exist and the crypto asset that was subject to an investment contract is no longer subject to that investment contract for purposes of the definition of a security under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Securities Exchange Act of 1934. Nevertheless, no safe harbor would apply to the definition of a security under Section 2(a)(36) of the Investment Company Act of 1940 or Section 2(a)(18) of the Investment Advisers Act of 1940.

To satisfy the conditions, the issuer must file Form TR with the SEC. Among other information, Form TR requires the disclosure of the issuer’s name, jurisdiction of incorporation or formation, address of principal executive offices, if applicable, a telephone number, and a brief description of the covered investment contract and crypto asset. Most importantly, the issuer must certify on Form TR that it is no longer contributing essential managerial efforts pursuant to the investment contract and provide an analysis supporting that certification. Regulation Crypto Assets would codify the SEC’s 2026 interpretive guidance regarding some of the circumstances under which a covered investment contract ceases to exist.

Under the 2026 interpretive guidance, the cessation of an investment contract could occur if the issuer has fulfilled, or failed to fulfill, the essential managerial efforts it represented. Fulfillment “depends on how the issuer defines or otherwise describes such efforts in marketing and promoting the investment contract.” Failure to fulfill occurs when investors no longer have a reasonable expectation of profit from the essential managerial efforts of others, such as when the promoter has abandoned the development of the crypto network and its crypto asset. Regardless of whether the issuer has fulfilled or failed to fulfill the essential managerial efforts it represented, Form TR would constitute a public announcement to current and prospective investors that the issuer will contribute no further managerial efforts to the prior business enterprise.

Despite the availability of the investment contract safe harbor, certain caveats still apply. The SEC would not be precluded from challenging whether an issuer has satisfied those conditions. Nor would the safe harbor prevent other parties from asserting that a crypto asset is subject to an investment contract or another type of security. Nevertheless, the SEC suggests that purchasers of crypto assets may still choose to take other steps to protect themselves, such as by negotiating contracts with their contractual counterparties to provide potential recourse.

Preemption of State Securities-Law Registration Requirements

In addition to providing these tracks to avoid registration, Regulation Crypto Assets also proposes to preempt state securities-law registration and qualification requirements for offerings under either exemption, as well as certain secondary market transactions. Under the proposal, covered investment contracts sold pursuant to either exemption would be “covered securities” under Section 18(a) of the Securities Act, displacing state registration and qualification requirements. Issuers would remain subject to states’ antifraud rules and notice-filing requirements. Preemption can help relieve issuers from another layer of regulatory burden prompted by the patchwork of state securities laws.

Preemption extends to offerings under both exemptions and to secondary market transactions — by any person other than the issuer, an underwriter, or a dealer — for as long as the issuer remains current with the exemption’s disclosure or reporting obligations, regardless of whether the resale itself was made under Regulation Crypto Assets. The rationale rests on the borderless character of crypto markets and the impracticality of state-by-state qualification for offerings unlikely to be regional or intrastate. The release also cites the investor protections built into both the startup and the fundraising exemptions as support for preempting both, rather than only Tier 2 offerings as under Regulation A.

Looking Ahead

Regulation Crypto Assets is a major step forward in facilitating primary issuances of crypto assets that are, or could be seen as, subject to an investment contract. That said, there will be further refinement to address comments the SEC has invited on potential issues with matters dealt with in the proposal, such as the frequency of disclosures of material changes to crypto assets or to their associated networks or applications, or the possibility of restricting resales by insiders.

Larger issues loom as well. The proposal leaves aside for now the effect of the proposed rules on the obligations of certain market intermediaries, such as broker-dealers and investment advisers, that assist with transactions in these assets. Further, the self-certification process to exit — or avoid — the proposed registration exemption framework will not shield offerings from challenge by third parties or the SEC. Accordingly, secondary market participants would be well advised to make their own determinations as to the security status of transactions in the assets covered by a self-certification report on Form TR.

Further in the background lies the possibility of congressional activity, as the Senate may act in September to advance its version of the CLARITY Act passed by the House of Representatives, although the prospects for further progress this session are not strong.

Nor is the SEC sitting still. In addition to reviewing comments on the proposing release, which are due October 20, 2026, the SEC may follow up on the Interpretation issued in March 2026 to address the many comments that have been submitted. In addition, the SEC submitted a custody rule for OMB review that would deal with crypto assets, and proposed a transfer agent modernization rule that would better accommodate the recording of securities transactions on a blockchain. In short, while much work has been done to realize the vision articulated last year by Chair Paul Atkins for “Project Crypto,” important work remains.