SEC proposal: Regulation Crypto Assets

Subpart A would provide the foundation for the Regulation Crypto Assets proposal. The proposal establishes key definitions that determine its scope and applicability, including the concepts of a ‘covered investment contract', ‘covered transaction’ and ‘crypto asset’.

The proposal introduces a principles-based disclosure framework intended to provide investors with material information tailored to the Issuer and offering (the Rule 103 Disclosures). The framework includes ten non-financial topics that would be disclosed in narrative format. Because the requirements are principles-based rather than prescriptive, Issuers would describe the material aspects of each topic tailored to their own facts and circumstances. These ten topics include, but are not limited to, covered investment contract terms and conditions, qualitative and quantitative details about the offering and subject crypto assets, and related persons.

The proposal would also establish disqualification provisions that limit access to the proposed exemptions for certain ‘bad actors’. Additional provisions address conditions for reliance on the framework and periodic inflation adjustments to exemption thresholds. Together, these rules would form the core definitions, disclosure and eligibility requirements of the offering framework.

Subpart B would exempt ’covered transactions’ (offers, sales and other distributions) from Securities Act §5 registration requirements for a four-year period if they satisfy certain conditions and requirements, including:

• A $5 million offering limit;
• One-time use and non-exclusive;
• Eligible Issuers may be an entity, individual or group;
• Web-based Rule 103 Disclosure requirements (no financial statements or assurance would be required); and
• Filing notice on specified forms on EDGAR to make investors aware the Issuer has begun relying on the exemption and when they cease to rely on the exemption.

*Offering limit thresholds would be subject to inflation adjustments at least every 5 years. Exemptions would not be available to Issuers subject to any disqualifying events or actions promulgated under existing Regulation A after the effective date of a final rule, if adopted.

Subpart C would use a two-tier regime that exempts Issuers conducting offerings of covered investment contracts up to $75 million in a 12-month period from Securities Act §5. The proposal would require multiple new forms to satisfy financial and non-financial reporting obligations. The table below summarizes key provisions of the fundraising exemption if the proposal is adopted as written:

Requirement	Tier 1 eligibility (≤$20M)	Tier 2 eligibility (≤$75M)
Issuer eligibility	Entities organized in the United States and are not a development stage company, are subject to the Investment Company Act or are otherwise disqualified. Majority of Issuer’s executive officers and directors are US citizens or residents, more than 50% of assets are located in the US, and Issuer’s business is administered principally in the US.
Offering statement	Uses new form specified in the proposal and must be filed on EDGAR. Continuous and delayed offerings are permitted.
Financial statements	Included in offering statement. Annual filing: Annual financial statements prepared in accordance with US GAAP. Semiannual filing: Semiannual financial statements prepared in accordance with US GAAP.	Included in offering statement. Annual filing: Annual financial statements prepared in accordance with US GAAP. Semiannual filing: Semiannual financial statements prepared in accordance with US GAAP. Article 8 presentation
Age of financials	Not older than nine months at filing/qualification.
Assurance	Annual and semiannual financial statements have no assurance requirements. Voluntary audit may be performed under US GAAS or PCAOB standards. Annual financial statements must be labeled as unaudited if no voluntary audit is performed. Voluntarily engaged auditor must be independent under AICPA standards (or Reg S-X Rule 2-01).	Annual financial statements must be audited under US GAAS or PCAOB standards. Semiannual financial statements have no assurance requirements. Auditor must be independent under Reg S-X Rule 2-01. The auditor does not need to be PCAOB-registered.
Non-financial disclosures	The following would be required in offering statements and filings to satisfy ongoing reporting obligations: Discussion of Financial Condition, covering material changes in financial condition, capital resources, results of operations, liquidity, among other narrative disclosures; Rule 103 Disclosures (or subset thereof for purposes annual and semiannual reporting obligations). This is the same non-financial disclosure requirement as Issuers that would rely on the proposal’s startup exemption; and Other disclosure requirements as stipulated within the new forms under the proposal.
Ongoing reporting	Annual report within 120 days of fiscal year-end; Semiannual report within 90 days of semiannual period-end; Current reports within four days of triggering event; and Special financial and transition reports.

 

*Offering limit thresholds would be subject to inflation adjustments at least every 5 years. Exemptions would not be available to Issuers subject to any disqualifying events or actions promulgated under existing Regulation A after the effective date of a final rule, if adopted.

Subpart D would codify the interpretive release – the covered investment contract is deemed to cease to exist once the Issuer completes or permanently ceases all promised “essential managerial efforts” and by filing a specified transition form with a supporting analysis.

Subpart E would introduce a new “qualified purchaser” definition that preempts state registration/qualification for primary and specified secondary sales — but only while the Issuer stays current with the exemption’s disclosure and reporting obligations.