The Proposal would establish two offering exemptions, a conditional safe harbor for investment contracts and broad preemption of state securities laws registration and qualification requirements.

By Paul M. Dudek, Zachary Fallon, Stephen P. Wink, and Deric Behar

Key Points:

  • The proposed rules would create two new offering exemptions for “covered investment contracts” involving cryptoassets: a Startup Exemption (permitting raises of up to $5 million over a four-year period, with no financial statement requirements) and a tiered Fundraising Exemption modeled on Regulation A (permitting raises of up to either $20 million or $75 million annually, with varying disclosure and reporting obligations).
  • The proposal builds on the SEC’s March 2026 Interpretive Release and the Howey framework by re-emphasizing the distinction between an investment contract (the security) and the underlying cryptoasset (not itself a security).
  • A new investment contract safe harbor would allow an issuer to self-certify that its covered investment contract has “ceased to exist” once all promised essential managerial efforts have been completed or permanently ceased, but the SEC retains authority to challenge such certification.
  • If finalized, the rules would broadly preempt state securities laws registration and qualification requirements for primary and secondary market transactions, though states would retain antifraud enforcement authority.

On August 18, 2026, the Securities and Exchange Commission (SEC or Commission) proposed Regulation Crypto Assets (the Proposal), establishing tailored offering exemptions, a principles-based disclosure regime, and a conditional safe harbor from the term “investment contract” in the definitions of “security” in the Securities Act of 1933 and the Securities Exchange Act of 1934. If the conditions of the proposed safe harbor are satisfied, then a cryptoasset would not be deemed subject to an investment contract for purposes of those definitions of “security.”

The Proposal builds on the SEC’s March 2026 Interpretive Release1 and was framed by the SEC as a response to a regulatory gap: “Without fit-for-purpose rules, existing regulatory requirements, many of which were adopted well before the proliferation of crypto assets, could complicate an issuer’s transaction planning and, in turn, impede capital formation and innovation in the crypto asset markets.”

SEC Chairman Paul Atkins described the proposed rules as supplying the “minimum effective dose, maximum freedom to build, and durable clarity under existing law,” replacing what he called a “‘square peg in a round hole’ approach.”

The Proposal, issued in the wake of continued delays to the CLARITY Act in Congress, includes over 150 requests for comment due by October 20, 2026.

Covered Investment Contracts: Scope and Definitions

The Proposal would apply to “covered investment contracts,” newly defined as “a contract, transaction, or scheme involving a crypto asset that constitutes an investment contract; provided that the investment contract must meet the following requirements: (1) a crypto asset is subject to the investment contract; (2) such crypto asset is not a security; and (3) no asset other than such crypto asset (including any security or non-security asset) is subject to the investment contract.”2

A “subject crypto asset” would be defined as a cryptoasset that is subject to a covered investment contract. This definition is “intended to reflect a key principle: for purposes of Regulation Crypto Assets, the ‘security’ at issue is the covered investment contract (to which the subject crypto asset is subject) rather than the crypto asset itself.” This critical distinction builds on the asset-versus-investment contract separation concept the SEC introduced in its March 2026 Interpretive Release.

The Startup Exemption

Proposed Rule 200 would provide a streamlined exemption for covered transactions by early-stage crypto projects.3 A covered transaction4 would be exempt from the registration requirements of Section 5 of the Securities Act if the issuer satisfied the rule’s conditions:

  1. All offerings must happen within a four-year window that starts when the issuer files its Form NOR (notice of reliance) on EDGAR and ends on the earlier of four years later or the date the issuer files its transition report (Form TR).
  2. The issuer can be an entity, an individual, or a group. If the issuer is a group, every member must sign the filings and certifications, and each is individually and collectively responsible for compliance.
  3. The issuer and its affiliates cannot reuse the exemption for the same cryptoasset (or a substantially similar one) to raise capital in excess of $5 million during the four-year window.
  4. The total aggregate offering price across all covered transactions during the period cannot exceed $5 million. Non-cash consideration (such as other cryptoassets) counts toward the cap at the value established by bona fide sales of that consideration or, if there are none, at fair value determined under an accepted standard.
  5. The issuer must file the Form NOR before any offering, make certain principles-based disclosures, keep them current (updating within 30 days after each calendar year-end for material changes), then file the Form TR.
  6. The issuer must satisfy the general conditions that apply across Regulation Crypto Assets, including principles-based narrative disclosure on 10 topics (from the investment contract’s terms to risk factors); bad actor disqualification rules that cross-reference Regulation A’s Rule 262 and cover the issuer, its officers and directors, major beneficial owners, promoters, and solicitors; mandatory electronic filing on EDGAR; and the SEC’s offering integration rules when conducting concurrent offerings under other exemptions.

The Startup Exemption would not mandate financial statements, investor accreditation, resale restrictions, or that the issuer be organized in the US, but issuers that rely on the Startup Exemption would remain subject to the antifraud and antimanipulation provisions of the Federal securities laws.

Under the March 2026 Interpretive Release, genuinely gratuitous airdrops (i.e., those to recipients who provide no money, goods, services, or other consideration) fall outside the securities laws entirely, because the first element of the Howey test (an investment of money) is not satisfied. Airdrops involving consideration, including tokens distributed in exchange for, in recognition of, or as an incentive for past or future use of the network or application, would be able to proceed under the Startup Exemption as covered transactions, subject to the $5 million cap and disclosure conditions noted above.

The Fundraising Exemption

Proposed Rules 300-307 would provide a more robust offering framework, modeled in part on Regulation A.5 The exemption would operate in two tiers:

  • Tier 1: Up to $20 million of covered investment contracts in a 12-month period, including no more than $6 million offered by selling securityholders that are affiliates of the issuer
  • Tier 2: Up to $75 million of covered investment contracts in a 12-month period, including no more than $22.5 million offered by selling securityholders that are affiliates of the issuer

The Fundraising Exemption imposes several conditions more restrictive than Regulation A and the Startup Exemption. An issuer must be an entity organized in the US, with a majority of its executive officers or directors who are US citizens or residents, more than 50% of its assets located in the US, and its business administered principally in the US. Those conditions would exclude foreign foundations and development teams with non-US majorities. Non-accredited investors would be subject to a 10% investment limitation (calculated on the greater of income or net worth) in both tiers, with no exception for securities listed on a national securities exchange.6 Unlike Regulation A, state registration and qualification requirements would be preempted in both offering tiers.

As under Regulation A, an offering under the Fundraising Exemption must be qualified by Commission action, and no sales may occur until the Division of Corporation Finance issues a notice of qualification. Offering documents are therefore subject to staff review and comment, and issuers may submit a draft offering statement for non-public review and test the waters before qualification. Compared with the Startup Exemption’s notice filing, an offering conducted pursuant to the Fundraising Exemption would be more involved, costly and time-consuming but would provide issuers with greater capacity to raise capital.

Ongoing reporting obligations would apply to both tiers, including annual reports on Form 1-KC, semiannual reports on Form 1-SC, and current reports on Form 1-UC,7 and the Proposal would prohibit at-the-market offerings.

Tier 2 issuers would be required to follow the financial statement requirements of Article 8 of Regulation S-X, as if they were smaller reporting companies, and to provide audited financial statements. Tier 1 financial statements would not need to comply with Regulation S-X and need not be audited, except when an audit has already been obtained by the issuer.

The Investment Contract Safe Harbor

Proposed Rule 400 would establish a mechanism by which a covered investment contract “will be deemed to have ceased to exist.” The safe harbor would require two conditions:

  • The issuer has “completed or otherwise permanently ceased all essential managerial efforts that it represented or promised it would engage in under the covered investment contract and is not making and does not intend to make any new representations or promises to engage in essential managerial efforts with respect to the crypto asset”
  • The issuer files Form TR on EDGAR with a certification and supporting analysis

The safe harbor would be non-exclusive8 and available to issuers that used either the Startup Exemption or the Fundraising Exemption. The safe harbor is also available to issuers that have not relied on either proposed exemption, providing a path for legacy projects that may have distributed tokens before Regulation Crypto Assets is adopted.

For foundations and development companies that continue building on a protocol after token launch, post-functionality maintenance work would not, by itself, maintain investment contract status. According to the Proposal, once an issuer has satisfied its promised efforts and the associated network or application is functional, “services to secure, maintain, improve, or enhance such a network or application or its functionality, or to facilitate network effects, whether through sponsoring or funding development projects or other similar activities, would not constitute essential managerial efforts” under Howey.9

The SEC, however, retains authority to challenge a Form TR certification after the fact. In addition, the safe harbor controls only the Commission’s enforcement authority: private plaintiffs and state regulators would still be able to assert that an exempt cryptoasset remains subject to an investment contract.

The safe harbor applies to the Securities Act and Exchange Act definitions of “security” but not to the parallel definitions in the Investment Company Act or the Investment Advisers Act, and a cryptoasset that qualifies for the safe harbor could still be treated as a security under those statutes. Asset managers may therefore be exposed to investment company registration concerns if their funds hold such cryptoassets, and protocol foundations may be exposed to investment adviser classification if they manage or advise on token treasuries. The SEC asks whether Rule 400 should be extended to the definitions of “security” in Investment Company Act Section 2(a)(36) and Advisers Act Section 201(a)(18).

Secondary Market Infrastructure

The Proposal confirms that if a non-security cryptoasset becomes subject to an investment contract, secondary market trades in the cryptoasset are securities transactions for as long as the investment contract is outstanding. Yet the Proposal provides no exchange or broker-dealer registration relief, such that no domestic digital asset trading platform could list such cryptoassets without registering as a national securities exchange, operating as an ATS, or taking a unilateral position on the asset’s regulatory status. The Proposal deliberately removes resale restrictions and preempts state registration requirements to promote network effects, but it appears not to allow for a compliant trading venue during the critical early stages of token proliferation.

State Preemption

The SEC maintains that because cryptoasset activity is inherently borderless, review and qualification of covered investment contract offerings is “a difficult and inefficient task for issuers to conduct on a state-by-state basis.” Proposed Rule 500 would therefore define “qualified purchaser” to preempt state securities laws registration and qualification requirements for both primary offerings under Regulation Crypto Assets and secondary market transactions10 with respect to a covered investment contract for which the issuer satisfies the requirements of an exemption under Regulation Crypto Assets.

Secondary market preemption would continue while the issuer remains subject to, and current with, its disclosure and reporting obligations, and it would extend to covered investment contracts that the issuer initially sold under other federal exemptions, such as Regulation D, so long as the issuer has satisfied a Regulation Crypto Assets exemption for that same covered investment contract. States would retain antifraud enforcement authority and the right to require notice filings and collect fees.

The Commissioners Weigh In

All three commissioners voted in favor of the Proposal, and their statements reflect a unified view that the prior administration’s enforcement-first approach failed market participants and investors alike.

Chairman Atkins framed the Proposal as a course correction for the SEC regarding cryptoassets, stating that the prior administration “actively undermined capital formation with regard to this asset class in the form of regulation by enforcement and disingenuous offers to ‘come in and register.’” He described Regulation Crypto Assets as “common-sense regulation” and declared that the SEC is “charting a road to invite innovators back to the United States.” Chairman Atkins also credited Commissioner Hester M. Peirce directly, calling the Proposal “a fulfillment of her original [2020 token safe harbor] idea.”11

Commissioner Peirce, who first proposed the idea in Running on Empty in 2020, noted in Filling the Regulatory Tank that “a whole generation has struggled with the SEC’s insistence, without regard for adverse effects on investors and entrepreneurs, that people apply a set of inapt rules to crypto.” She described the Proposal as “one step on a long road toward a clear, sensible, enforceable regulatory framework for crypto” and welcomed feedback on “facilitating the ability of crypto assets to serve a role akin to equity to enable token holders to share in the growth and value of the enterprise that builds a crypto network.”

Commissioner Mark T. Uyeda stated that “the Commission’s approach to crypto in recent years” through enforcement actions “deprived the public and market participants of the opportunity to have input into the development of workable rules.” Issuers that attempted to comply in good faith “found themselves facing subpoenas and litigation.” The Proposal, Commissioner Uyeda argued, would “replace the guesswork with fixed thresholds, defined disclosure obligations, and a set of conditions that issuers can measure themselves against before they make their offering.”

Practical Implications

Regulation Crypto Assets constructs a viable path forward for crypto investment contracts within the existing statutory framework, addressing offering exemptions, disclosure obligations, and safe harbor treatment through a single, coordinated rulemaking.

For practitioners and market participants, several practical considerations follow, assuming the SEC adopts the Proposal:

  • Issuers of existing tokens should evaluate whether the investment contract safe harbor provides a path forward, particularly where essential managerial efforts have already concluded or are winding down.
  • Early-stage projects contemplating token offerings should assess the Startup Exemption as an alternative to existing exempt offering frameworks.
  • Projects seeking to raise significant capital should compare the Fundraising Exemption’s conditions (including offering limitations, the US organizational requirements and non-accredited investor limitations) against the requirements of Regulation D.

Intermediaries, including exchanges, brokers, and asset managers, would face continued uncertainty, as the Proposal provides no express reliance safe harbor for third parties acting on an issuer’s Form TR certification. With this Proposal, the SEC both acknowledges and attempts to address a shortcoming that market participants have identified for years, namely that existing SEC rules are not fit for purpose with respect to investment contracts involving cryptoassets.

Stakeholders with views on the Proposal’s many open issues should engage in the comment process, which will be critical to any final rulemaking.

Follow this and other critical developments on Latham’s US Crypto Policy Tracker.

  1. Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets, available at https://www.sec.gov/files/rules/interp/2026/33-11412.pdf. See this Latham blog post.  ↩︎
  2. The Proposal’s discussion (footnote 192) also maintains that covered investment contracts are not “equity securities” under Exchange Act Section 3(a)(11) and therefore are not subject to Section 12(g) registration requirements. ↩︎
  3. Note that the SEC does not require that “an issuer be a ‘startup’ or early-stage in order to use the Startup Exemption, so long as the issuer satisfies the exemption’s conditions.” ↩︎
  4. A “covered transaction” would be defined as an offer, sale, or other distribution of a covered investment contract in reliance on the Startup Exemption, including, but not limited to:
    1. Any public or private offering, including a distribution, of a covered investment contract in one or a series of capital raising transactions; or
    2. Any public or private offering, including a distribution and transactions referred to as “airdrops,” of a covered investment contract in one or a series of transactions in exchange for, in recognition of, as or incentive for past or future use of an associated crypto network or associated crypto application, or as a reward or incentive for conducting activities primarily related to operating, governing, or securing an associated crypto network or associated crypto application. ↩︎
  5. Covered investment contracts under the Proposal are not equity securities, debt securities, or convertible debt, and therefore fall outside Regulation A’s definition of “eligible securities.” The SEC relied instead on its general exemptive authority under Section 28 of the Securities Act, which conditions any exemption on a finding that it is both “necessary or appropriate in the public interest” and “consistent with the protection of investors.” ↩︎
  6. Under Regulation A, that limit applies only to Tier 2. ↩︎
  7. Under Regulation A, ongoing reporting applies only to Tier 2 issuers. ↩︎
  8. Notably, according to the Proposal discussion, “even if an issuer has not satisfied the investment contract safe harbor, a crypto asset may nonetheless not be subject to an investment contract under the Howey test. That is, the investment contract safe harbor, if satisfied, does not provide the sole means by which a crypto asset may fall outside the scope of the Federal securities laws.” [Emphasis added] ↩︎
  9. This builds on the March 2026 Interpretive Release, which established that a non-security cryptoasset is no longer subject to an investment contract when the issuer fulfills its representations or promised efforts, “even if the issuer continues to provide efforts that are not essential managerial efforts.” ↩︎
  10. Consistent with Securities Act Section 4(a)(1), this would be limited to ordinary aftermarket transactions by any person other than an issuer, underwriter, or dealer. ↩︎
  11. See Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization, available at https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-blockress-2020-02-06, and Token Safe Harbor Proposal 2.0, available at https://www.sec.gov/newsroom/speeches-statements/peirce-statement-token-safe-harbor-proposal-20. For further analysis, see this Latham blog post. ↩︎