Filling the Regulatory Tank: Regulation Crypto Assets Proposing Release

In 2020, I spoke about my encounter on a stormy New Jersey night and an empty tank with a recalcitrant gas station attendant and the state's law that customers cannot pump their own gas.[1] The moral of that story was that rules should be written so that well-intentioned people can follow them without having to abandon legitimate pursuits. Having rules that are sensible, clear, and enforceable is key to a well-functioning society. People whose ambition is to build good things for other people can work with such rules, and government can enforce them. That night decades ago in New Jersey, I struggled with how to reconcile a law that said I could not pump my own gas with a gas station attendant's insistence that I do so. More recently, 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. Today, as part of the broader initiative of which legislative efforts are the centerpiece, the Commission took an important step toward putting clear, sensible, enforceable rules in place for crypto offerings.

The gas station attendant in New Jersey told me that I had to do everything myself, but today's proposal reflects the work of many. Our journey toward crypto clarity began in earnest five years after the gas station speech with a set of questions from the newly formed Crypto Task Force.[2] The public, including crypto fans and crypto critics, responded generously with sage advice, questions of their own, and serious suggestions for crafting effective regulations.[3] Commission staff, using this input and their own recent experience in attempting to apply ill-fitting rules to a new industry, threw themselves into developing and refining a regulatory framework for crypto, including the proposal before us today. My thanks go especially to Jim Moloney, Sebastian Gomez Abero, Andy Schoeffler, Valian Afshar, Patrick Faller, John Fieldsend, Irene Paik, and Nolan McWilliams. Many others across the Commission, including staff from the Division of Corporation Finance, the Office of General Counsel, the Division of Economic and Risk Analysis, and the Crypto Task Force lent a hand on this proposal.

Today, the Commission proposes new fundraising pathways tailored for the unique characteristics of crypto assets being sold as part of investment contracts. Regulation Crypto Assets would include two exemptions from registration under the Securities Act of 1933. The startup exemption would permit offerings of up to $5 million during a four-year period. The fundraising exemption, conditioned on the provision of financial statements and ongoing reporting requirements, would permit offerings of up to $75 million during each 12-month period. Both exemptions would require principles-based disclosures, and the antifraud and antimanipulation provisions of the Federal securities laws would apply as usual.

In addition to the startup and fundraising exemptions, the proposed rules would include a conditional safe harbor by which an issuer of an investment contract could delink a crypto asset from the investment contract with which it was once associated. The safe harbor complements the recent interpretation by the SEC and CFTC of how a crypto asset may cease to be subject to an investment contract.[4]

The exemptions and safe harbor we are proposing today will not fit every model, and we want to hear your feedback. The Commission wants to accommodate innovation on many fronts, and our rules need to be tailored to changing market developments and designed to protect investors and market integrity. I would particularly welcome thoughts 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. This proposal is one step on a long road toward a clear, sensible, enforceable regulatory framework for crypto. The Commission cannot walk that road alone, so please send us your thoughts during the sixty-day comment period.