The Securities and Exchange Commission (SEC) has proposed a new way for crypto projects to raise as much as $5 million from the public without providing investors a single financial statement.
There would be no per-investor limit. Non-accredited investors could participate. General solicitation would be allowed. The securities generally could be resold without the one-year restriction that applies to securities sold under Regulation Crowdfunding. The issuer would not need to conduct the offering through a registered crowdfunding platform.
Dear GameStop Stock Fans, Mark Your Calendars for September 8
Why Analysts Think Sellas Life Sciences Stock Can Gain 150% From Here
Jensen Huang: Nvidia's Vera Rubin Platform Turns Electricity Into a $40 Billion Cash Machine
Tired of missing midday reversals? The FREE Barchart Brief newsletter keeps you in the know. Sign up now!
This proposal raises an uncomfortable question: How much protection does an antifraud law provide when many of the mechanisms designed to identify problems before investors hand over their money have been removed?
The proposal is called Regulation Crypto Assets. The SEC issued it on Aug. 18, it was published in the Federal Register on Aug. 21, and comments are due Oct. 20. It carries File No. S7-2026-27. Nothing in it is currently in force, and the Commission would have to vote again to adopt a final rule.
The most consequential part may be what the SEC calls its "startup exemption." It would exempt offerings of covered crypto investment contracts from Securities Act registration for up to $5 million during a four-year period.
The issuer could be a company. It could also be an individual or a group.
Sponsored Content: The Trillion-Dollar Energy Opportunity Investors May Be Missing
Instead of financial statements, investors would receive principles-based narrative disclosures covering the investment contract, the token, management and conflicts, the development plan, token economics and allocation, governance, the associated network or application, and risk factors. The issuer would file a short Form NOR with the SEC identifying itself and the crypto asset, but the substantive disclosures could live on the issuer's own website rather than being filed on EDGAR. The issuer would have to keep them publicly available and update them for material changes.
That is not 0 regulation. It is, however, a dramatically different kind of regulation.
Consider what happens when an ordinary small business wants to raise the same amount of money from retail investors under Regulation Crowdfunding.
Reg CF also permits an issuer to raise up to $5 million, although its limit applies over 12 months rather than the four-year period in the proposed crypto startup exemption. But Reg CF requires the offering to run through an SEC-registered broker-dealer or funding portal. The issuer files a Form C. Financial statements are required, with the level of outside accountant involvement depending on the circumstances. Non-accredited investors also face statutory investment limits. Someone below the applicable income or net-worth threshold is generally limited to the greater of $2,500 or 5% of the greater of income or net worth. Higher-income and higher-net-worth non-accredited investors can generally invest 10%, subject to an aggregate $124,000 ceiling.
