When a blockchain developer raises funds to build a new blockchain-based protocol, it often does so by selling a cryptocurrency, or token, that, as the theory goes, will at some point in the future be used to access the protocol that eventually gets built. The fundraising resembles a traditional initial public offering, whereby a company raises money by selling shares to the public and invests the proceeds back into the business. Just as the value of those shares increases as the company grows, the value of the token should increase as more people use the protocol, even though tokens are not formal equity in the developer. But while they may not be equity, offers and sales of these tokens have historically been treated as investment contracts, which fall within the statutory definition of a security under the federal securities laws.
Because the Executive Branch has been captured by the crypto industry, that common sense interpretation may soon end. On August 18, the Securities and Exchange Commission proposed Regulation Crypto Assets, a sweeping regime that would allow many public token offerings to proceed without Securities Act registration and give existing crypto projects a self-certified path out of securities-law treatment. The proposal delivers much of what the industry has spent years seeking: easier access to retail investors, immediate token liquidity, broad preemption of state securities laws, and a mechanism for exiting federal securities regulation altogether. Welcome to policymaking by crypto, for crypto.
Chairman Paul Atkins called the proposal “a package of exemptions that would facilitate capital formation and allow crypto asset innovation to flourish in the United States.” The proposal is better understood as an extraordinary exercise of administrative power on behalf of an industry that has spent historic sums electing crypto-friendly candidates. Its most consequential provisions rest on aggressive interpretations of the SEC’s existing statutory authority, and its $75 million fundraising exemption attempts to construct by administrative rule a public capital-raising regime that Congress has never authorized specifically for crypto. The principal beneficiaries are the venture firms, token issuers, and trading platforms that have spent years lobbying for precisely this result.
The Separation Theory Strikes Again
The conceptual foundation of the proposal is the “separation theory,” the crypto industry’s argument that a token sold as part of an investment contract is separate from that investment contract and therefore is not itself a security. The theory is embedded in the proposal’s threshold definition: a “covered investment contract” is an investment contract to which a crypto asset is subject, provided that the “crypto asset is not a security.” The proposal thus codifies the Commission’s March 17, 2026 interpretive release, which announced that a non-security crypto asset may be offered and sold as part of an investment contract without the asset itself becoming a security, and that the investment contract “ceases to exist” once the issuer fulfills, or abandons, its promises.
I explained why the separation theory fails on its own terms in my March 2025 statement to the SEC’s Crypto Task Force, in a recent post on Title I of the CLARITY Act, and in a thread on X. A token is created by the promoter, is unique to the promoter’s enterprise, and serves as the means by which investors enter and exit that enterprise. When the promoter’s promised return consists of increasing the token’s market value, the token is the instrument through which the scheme operates. In SEC v. W.J. Howey Co., the Supreme Court refused to let a promoter escape the securities laws by pointing at the oranges. The Atkins Commission is now pointing at the oranges on the industry’s behalf.
What the SEC Proposed and Why
The 402-page proposing release has four principal components. A “startup exemption” would allow an issuer – including a natural person or informal group – to offer, sell, or distribute up to $5 million of covered investment contracts over as long as four years. The issuer would file a short notice and place principles-based disclosures on a public website but provide neither financial statements nor a discussion of its financial condition.
A “fundraising exemption,” modeled on Regulation A, would permit offerings of up to $20 million under Tier 1 or $75 million under Tier 2 during any 12-month period, with an SEC-qualified offering statement, financial statements, and continuing reports. Rule 400 would deem a covered investment contract to have ended after the issuer certifies that it completed – or permanently ceased – the managerial efforts it promised investors. Rule 500 would preempt state registration and qualification laws for the new offerings and many qualifying secondary-market transactions.
The timing tells its own story. The Commission had scheduled an open meeting for Friday, August 14 to unveil the proposal, then cancelled it the night before, citing “an unforeseen scheduling issue.” Eleanor Terrett reported that the White House requested the postponement out of concern that the proposal “could complicate Clarity Act negotiations ahead of the Senate’s procedural vote in September.” Semafor similarly attributed the delay to White House concerns that unilateral SEC action could undermine the legislation. The concern is understandable. The CLARITY Act passed the House in July 2025 but has stalled in the Senate, where it needs at least seven Democratic votes. If the SEC delivers much of the industry’s wish list by rule, the pressure on Congress to deliver it by statute diminishes.
Whatever prompted the White House’s initial hesitation, it did not last long. Just four days after the cancelled meeting, the SEC released the proposal anyway. The reversal suggests the administration is increasingly willing to use existing regulatory authority to deliver the crypto policies Congress has thus far declined to enact, even at the risk of further weakening the legislative push. Reuters described the broader strategy as securing near-term regulatory gains for the industry while recognizing that those gains remain vulnerable to litigation or reversal by a future administration.
The regulatory push continued immediately after the proposal’s release. On August 19, President Trump hosted leading crypto executives, along with SEC Chairman Paul Atkins and CFTC Chairman Michael Selig, at the White House and urged Congress to pass a “fair version” of the CLARITY Act. The next day, many of the same executives convened at the CFTC’s new Innovation Advisory Committee, which opened its substantive program with “Crypto’s Regulatory Evolution: From Uncertainty to Clarity,” a discussion that included how regulators could use their existing authority to modernize crypto regulation while complementing any legislation Congress ultimately enacts.
These developments come after the crypto industry spent extraordinary sums to shape the political environment in which its regulators now operate. By mid-2026, crypto firms had spent $189 million to influence the midterm elections, according to a Public Citizen analysis reported by Reuters. Fairshake and its affiliates began the year with more than $193 million in cash, nearly $60 million more than they spent during the 2024 election cycle. If Regulation Crypto Assets is finalized substantially as proposed, the industry will have received an extraordinary return on that political investment.
Why the Proposal is Such a Boon for Crypto Venture Capitalists
To understand the windfall for crypto venture capitalists, it helps to understand how tokens are born. Jake Donoghue, who ran a crypto marketing firm and recounted the industry’s practices in Crypto Confidential, describes the standard playbook:
“In almost all cases, founders had to start by going after venture capital. Before a new token hits the market, a select cohort of venture capitalists is usually given the opportunity to buy a load of them at a discounted rate. This guarantees they can get there first, before Joe Public has a chance to buy or sell. It’s not like there’s one flat rate for all VCs though. Instead, VCs will be grouped into rounds, with the best and most desirable VCs in the first round. Here the token will be offered at its lowest price, creating more of an incentive to invest. The price will then increase with subsequent rounds, with the less desirable VCs having to fork out more than the first-round contingent, but still getting a potentially vast discount on the eventual public sale price. The process of selling tokens to VCs is known as a private sale, so called because it precedes the public sale round, in which the token is made available to ordinary investors.”
Donoghue is equally direct about what those investors do with their discounted tokens:
“The problem with this system is that VCs, by their nature, are incredibly mercenary. If a VC has backed a project, they will naturally expect a return on their investment. VCs have also come to learn that much of the cryptocurrency ecosystem is propped up by flimsy and fickle hype on the part of founders and investors. Hype circles are generally self-sustaining … until they aren’t. Consumer confidence can crash in the space of seconds, and a token that might have seemed watertight this morning can hit $0 by lunchtime. Savvy VCs know this, and their response is to make sure they always cash out long before the wheels have a chance to come off. As such, they have gathered a well-earned reputation for being ‘dumpers’ – a loaded industry term for individuals or institutions that habitually sell their tokens the second they get their hands on them.”
Traditional venture investing constrains this dynamic. A fund usually buys startup equity in a private placement, receiving restricted securities that cannot be publicly resold without registration or another exemption. Under Rule 144, the holding period is generally six months for a reporting issuer and one year for a nonreporting issuer – the usual category for a private startup – and affiliates face additional sale conditions. Venture exits often arrive years later through an acquisition or IPO, after substantial diligence and, in an IPO, audited financial statements and prospectus liability.
American University law professor Hilary Allen has documented how token financing collapses that structure. Venture funds receive tokens alongside their investments, and treating those tokens as non-securities makes resale much easier. In congressional testimony, she explained that enforcing registration rules would likely make venture firms hold crypto investments longer and preserve “skin in the game.” Remove resale discipline and the incentives change: VCs buy early at a discount, promoters manufacture public demand, insiders sell into the liquidity they helped create, and retail purchasers absorb the downside.
The startup exemption is engineered for that sequence. No major federal capital-raising exemption currently combines retail access, general solicitation, immediately transferable securities, no registered intermediary, no individual investment limit, and no financial statements. Rule 506(c) permits solicitation but restricts sales to verified accredited investors and produces restricted securities. Regulation Crowdfunding requires an intermediary, financial disclosure, investor limits, and a one-year resale restriction. Regulation A requires SEC qualification and financial statements. The startup exemption discards all those compensating protections at once.
The proposing release celebrates the result: covered investment contracts “would not be restricted securities” and, absent another applicable restriction, could be sold immediately. The issuer may be an individual or informal group, and its principles-based disclosures sit on a website of its choosing. The result is that a person, or group, with no corporate entity, financial statements, or intermediary could raise $5 million from retail investors on the strength of a whitepaper.
The treatment of insiders is more generous still. The proposal requires an issuer to disclose any resale or transfer restrictions applicable to founders and other related persons, but it imposes no lockup and no vesting requirement. The Commission knows this is a problem; Question 35 of the release asks whether it should instead “require that issuers establish a specific minimum holding period for related persons, such as a one-year holding period,” or a holding period tied to development milestones. Remarkably, the industry itself asked for more. The release records that both a16z and Coinbase recommended that any exemption include limitations on insider sales, with Coinbase suggesting a limit on sales by the development team “until the network or protocol has become sufficiently decentralized.” The SEC is now more solicitous of crypto insiders than the industry’s own lobbyists.
The Senate’s June 2026 CLARITY text, for all its defects, imposes concrete insider constraints. Before a blockchain system is certified as mature, covered related and affiliated persons generally must hold issuer-acquired units for at least 12 months and remain within percentage-based sale limits. After maturity, affiliated persons remain subject to a holding period and annual cap. The bill also ties maturity to a filing intended to establish that no person or group controls the system. The SEC proposal asks issuers to disclose whatever restrictions they voluntarily adopted.
The Commission invokes “network effects” to justify unrestricted distribution. Some protocols may indeed become more useful as participation grows. But the release never explains why that requires unrestricted speculative resale, immediate insider liquidity, or no retail investment limit. Network use and token speculation are different. A rule could facilitate distributions needed to test, secure, or use a network while preventing insiders from monetizing discounted allocations before promised development is complete. Regulation Crypto Assets declines to draw that line.
Rule 400: The Self-Certified Exit
Rule 400 is an exit door for any issuer of a qualifying covered investment contract, including projects that never use Regulation Crypto Assets to distribute tokens. The SEC estimates that 475 issuers each year would rely on the safe harbor without using either offering exemption –more than three and a half times the combined number of startup and fundraising offerings the Commission expects annually. If those estimates prove accurate, Rule 400 will matter far more in practice than either of the proposal’s new offering exemptions.
To use Rule 400, an issuer determines that it “has completed or otherwise permanently ceased all essential managerial efforts” it represented or promised it would undertake, and that it does not intend to make new such promises. It then files a new Form TR containing identifying information, a description of the investment contract and crypto asset, a certification that the conditions are satisfied, and a supporting analysis. No staff review, Commission order, or waiting period follows. Filing immediately satisfies the transition-report requirement, and the contract is deemed to have ended for the Commission’s purposes if the substantive conditions were actually met.
That qualification matters. Filing does not make a false certification true; the SEC may later determine that obligations continued. Rule 400 also does not erase liability for prior unregistered sales, fraud, or breached promises. Its effect is prospective from the point where the conditions are satisfied. But the only ex ante check is the issuer’s analysis. Regulatory scrutiny comes later, if it comes at all.
Two features of Rule 400 deserve particular alarm. The first is that the safe harbor covers both an issuer that fulfills its promises and an issuer that permanently stops trying. That may follow from the Commission’s version of Howey: once purchasers no longer reasonably expect the issuer to perform those essential managerial efforts, the investment contract may end. As policy, however, it allows continuing securities-law disclosure to switch off when a project abandons the work that induced the investment, which is precisely when investors may most need information about what failed and what insiders will do next. Question 133 asks whether the safe harbor should instead be limited to issuers that fulfilled their promises That the question needs asking says a lot about who the proposal is designed to serve.
The second concern is that the issuer grades its own homework, using a rubric the issuer wrote. Rule 400’s benchmark is the issuer’s own promised “essential managerial efforts,” as the issuer described them in its own marketing. Decentralization plays no role, and no objective market test applies. The release goes further, stating that once a network or application is functional, services to “secure, maintain, improve, or enhance” it, to sponsor continuing development, or “to facilitate network effects” generally would not constitute essential managerial efforts at all. Therefore, an issuer that drafts its promises narrowly can exit the securities laws through Rule 400 while continuing substantial, value-driving work relabeled as “maintenance” and “ecosystem support.”
Here again, CLARITY is more demanding. Its mature-system framework asks whether a person or group still controls the system and requires a filing intended to establish the answer. Rule 400 asks whether the issuer completed the promises it chose to make. One standard tests continuing control; the other rewards careful drafting of promotional commitments.
Rule 400 also presents a legal dilemma. If it is merely an internal enforcement safe harbor, it provides far less certainty than advertised. The release says it governs only the Commission’s administration of the securities laws and does not prevent other parties from arguing that the token remains subject to an investment contract. A Form TR binds no court or private plaintiff. If the rule instead purports definitively to remove an instrument from the statutory definition of “security,” the Commission must explain where Congress authorized an issuer’s certification to settle a judicially developed term. Either the safe harbor is legally modest and practically uncertain, or legally ambitious and vulnerable. Issuers will file, exchanges will list, and litigation will follow. This is a recipe for chaos, not clarity.
Rule 500: Preempting the States
What Rule 400 cannot deliver through preclusion, Rule 500 attempts through preemption. It would treat as a “qualified purchaser” every person offered or sold a covered investment contract under Regulation Crypto Assets and every purchaser in a qualifying secondary transaction by someone other than an issuer, underwriter, or dealer, provided the issuer satisfied an exemption and remains current. State registration, qualification, and merit-review laws would be preempted for startup offerings, both fundraising tiers, and a broad swath of secondary trading.
The Commission has precedent. In Lindeen v. SEC, the D.C. Circuit upheld treating every purchaser in a Regulation A Tier 2 offering as qualified. But Rule 500 goes further. Tier 2 offerings are SEC-qualified, contain audited financial statements, impose retail investment limits, and require continuing reports. Rule 500 would extend preemption to the startup exemption, which has none of the first three protections and keeps disclosure on an issuer-controlled website. It would also extend preemption into secondary transactions rather than confining it to the reviewed primary offering.
The release says that if an issuer sold some fungible covered investment contracts under the fundraising exemption and others under Regulation D, secondary transactions in all of them could receive preemption so long as the issuer remained current. Exchanges and market makers are obvious beneficiaries. States would retain antifraud authority but lose registration, qualification, and merit-review tools that allow them to intervene before investors lose their money. NASAA, which represents state securities regulators, has emphasized that investment-contract law is a central tool for combating digital-asset scams, including schemes operating through secondary markets. The proposal would therefore substantially weaken state regulators’ ability to stop fraudulent and abusive crypto offerings before the damage is done, leaving them largely to pursue bad actors after investors have already lost their money.
The mechanics of this preemption regime are unfinished. Startup disclosures reside on an issuer’s own website, yet the availability of preemption depends on the issuer remaining current with those disclosures. Questions 141 through 143 ask how purchasers, exchanges, and other market participants should determine whether preemption applies to a particular transaction. The SEC is thus proposing to displace state preventive regulation without first establishing a reliable mechanism for market participants—or state regulators themselves—to determine whether federal preemption applies.
How Far Can Section 28 Reach?
All of this is being done under statutory authority that has never carried this much weight. Regulation A, Regulation D, and Regulation Crowdfunding each rest on specific congressional grants: sections 3(b)(1) and 3(b)(2) of the Securities Act and the JOBS Act’s crowdfunding title. The startup exemption’s $5 million ceiling tracks section 3(b)(1)’s statutory maximum. The fundraising exemption is another matter. The release concedes that covered investment contracts fall outside section 3(b)(3)’s definition of the “eligible securities” that may be offered under a section 3(b)(2) exemption, which is why Regulation A itself is unavailable.
Unable to use the authority Congress provided for Regulation A-style offerings, the Commission reaches instead for Section 28, the general exemptive authority Congress added to the Securities Act in 1996. Section 28 authorizes the SEC to exempt any person, security, transaction, or class thereof from provisions of the Securities Act when specified conditions are satisfied. The Commission has used this authority before, including to create and expand registration exemptions, but it has never built a nationwide public capital-raising regime of this scale on Section 28 alone. Regulation Crypto Assets would use that general authority to create a parallel $75 million offering regime for the very investment contracts that the Commission acknowledges are ineligible for the specific Regulation A framework Congress established.
That authority is also subject to an important statutory constraint. Section 28 permits an exemption only “to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.” The Commission must therefore explain why removing registration protections from these retail token offerings satisfies both requirements. The record makes that a difficult case. Bitcoin trades near $73,000, roughly half its October 2025 all-time high of $126,210, while total crypto market capitalization has fallen from roughly $4.2 trillion to just over $2 trillion, making the first half of 2026 the market’s worst since 2022. Unlike traditional stocks and bonds, the tokens covered by the proposal generally convey no conventional claim on an issuer’s cash flows or assets, leaving their value heavily dependent on continued demand in highly volatile secondary markets. Yet the proposal would facilitate greater retail participation while allowing immediate transferability and, under the startup exemption, requiring no financial statements, intermediary, individual investment limit, or mandatory insider lockup. The Commission’s own economic analysis acknowledges the informational advantages enjoyed by insiders and evidence supporting lockups, then declines to require one. Meanwhile, the President reported more than $1.4 billion in crypto-related income for 2025 on his own ethics disclosure. A Commission proposing to find this regime consistent with the public interest and the protection of investors should expect that conclusion to be tested in court. Section 28 requires more than a generalized preference for innovation; the SEC will have to explain why investor protection means allowing insiders to leave sooner while retail investors arrive earlier.
Policymaking by Crypto, for Crypto
Comments on Regulation Crypto Assets are due 60 days after publication in the Federal Register. The Commission will read them, but there is little suspense about whose views will carry the day. Ninety-three years ago, Congress responded to a stock market collapse by requiring the people who sell promises to the public to register them, disclose them, and stand behind them. The Atkins Commission is responding to crypto’s record of insider enrichment and retail loss by letting a new class of promisors sell without registration and certify their own promises kept, or abandoned, on a form effective when filed. The comment period is open to everyone. The proposal has already told us which comments count.
Lee Reiners is a Lecturing Fellow at Duke University
