Background

On August 18, the SEC proposed a new offering framework, titled “Regulation Crypto Assets,” specifically designed for offerings involving Covered Investment Contracts. The proposal represents the culmination of the SEC’s “Project Crypto” initiative, launched by Chairman Paul S. Atkins in July 2025, and incorporates recommendations from the President’s Working Group on Digital Asset Markets, extensive Crypto Task Force roundtables, and public comment solicited since early 2025. If adopted, Regulation Crypto Assets would provide the operational infrastructure for how issuers navigate the federal securities laws during the life cycle of a Covered Investment Contract.

As cited in the proposal, since early 2025, the SEC has contemplated 10 topics with respect to crypto assets: (1) Security Status, (2) Scoping Out, (3) Public Offerings, (4) Safe Harbor from Registration, (5) Trading, (6) Custody, (7) Crypto Lending, (8) Crypto Exchange-Traded Products, (9) Tokenized Securities, and (10) Sandbox and Related International Issues. Notably, Regulation Crypto Assets only addresses the first four topics and does not provide the regulatory clarity and guidance needed to support the custody and secondary trading of Covered Investment Contracts.

Key Definitions:

  • Crypto Asset: Any digital representation of value recorded on a cryptographically secured distributed ledger. For the purposes of Regulation Crypto Assets, the “security” at issue is the Covered Investment Contract and not the underlying crypto asset itself.
  • Covered Investment Contract: A contract, transaction, or scheme that constitutes an investment contract, provided that the investment contract meets the following requirements: (i) the applicable crypto asset is subject to the investment contract, (ii) such crypto asset is not a security. and (iii) no asset other than such crypto asset (including any security or non-security asset) is subject to the investment contract. A Covered Investment Contract excludes an investment contract that involves a crypto asset that itself is a security and an investment contract that involves any asset other than a non-security crypto asset.
  • Covered Transaction: Any offer, sale, or other distribution of a Covered Investment Contract under the Startup Exemption, including capital raises, airdrops, staking rewards, governance distributions, and other network incentive mechanisms.

The Startup Exemption (Rule 200)

Under Regulation Crypto Assets, an issuer would be exempt from the registration requirements of the Securities Act for a one-time offering of up to $5 million during a four-year period (Startup Exemption Period), subject to satisfying certain conditions. The conditions include making public filings at the beginning and end of the Startup Exemption Period and making principles-based disclosures to investors. During the Startup Exemption Period, the issuer may work toward fulfilling its represented essential managerial efforts while distributing crypto assets to build network effects. Issuers that rely on the Startup Exemption would remain subject to the anti-fraud and anti-manipulation provisions of the federal securities laws.

Key Features:

  • The offering limit under the Startup Exemption is $5 million in the aggregate over the Startup Exemption Period, which is a period of up to four years from filing a notice of reliance (via Form NOR) with the SEC.
  • The Startup Exemption is available to entities, individuals, and groups of individuals and entities. An issuer and its affiliates may rely on the exemption only once per subject crypto asset (or substantially similar asset).
  • Under the Startup Exemption, as proposed, Covered Investment Contracts would not be restricted securities (i.e., would be available for immediate resale), would be available for retail investors (i.e., nonaccredited investors), and would not be subject to prohibitions against general solicitation.
  • Principles-based narrative disclosures must be publicly accessible on a website, with annual amendments for material changes. Financial statements are not required.
  • Issuers must file Form TR upon the earlier of four years or the cessation of the Covered Investment Contract.

The Fundraising Exemption (Rules 300–307)

For issuers requiring more substantial capital, Regulation Crypto Assets also proposes the Fundraising Exemption, which permits issuers to raise up to $20 million under a Tier 1 offering and up to $75 million under a Tier 2 offering, in each case in a 12-month period. Issuers relying on the Fundraising Exemption would be required to file offering materials that provide the same principles-based narrative disclosures required under the Startup Exemption, financial statements, and ongoing reports. As with the Startup Exemption, issuers that rely on the Fundraising Exemption would remain subject to the anti-fraud and anti-manipulation provisions of the federal securities laws.

Key Features:

  • The key difference between a Tier 1 and Tier 2 offering under the Fundraising Exemption, other than the offering limits, is that a Tier 1 offering does not require audited financial statements whereas a Tier 2 offering does require such statements.
  • Under the Fundraising Exemption, an issuer must be a U.S. entity, the majority of its officers/directors must be U.S. citizens or reside in the U.S., it must have more than 50 percent of its assets in the U.S., and its business must be administered principally in the U.S.
  • As is the case with Regulation A, a nonaccredited investor would be subject to investment limits equal to 10 percent of the greater of the investor’s income or net worth.
  • Offering statements must be filed electronically (via Form 1-CRYPTO) and be qualified by SEC staff before the offering may commence. Unlike a Tier 1 offering under Regulation A, a Tier 1 offering under the Fundraising Exemption would be subject to ongoing reporting requirements.

The Investment Contract Safe Harbor (Rule 400)

Under Regulation Crypto Assets, the proposed Rule 400 codifies the SEC’s 2026 interpretation regarding when a Covered Investment Contract ceases to exist (Investment Contract Safe Harbor). If an issuer satisfies the Investment Contract Safe Harbor’s conditions, the SEC will deem the Covered Investment Contract to have ceased, and the underlying crypto asset will no longer be subject to the federal securities laws for purposes of the definitions of “security” in both the Securities Act and the Exchange Act. Although the Investment Contract Safe Harbor provides a path for issuers to no longer be subject to federal securities laws, Regulation Crypto Assets does not provide guidance or requirements for how broker-dealers and other custodians should treat crypto assets that once were Covered Investment Contracts but are no longer Covered Investment Contracts under Rule 400.

Conditions:

  1. The issuer has completed or otherwise permanently ceased all essential managerial efforts it represented or promised it would engage in under the Covered Investment Contract.
  2. The issuer 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.
  3. The issuer files a transition report (via Form TR) with the SEC containing its certification and supporting analysis.

Critical Considerations:

  • The Investment Contract Safe Harbor is nonexclusive and does not preclude an issuer from relying on another exemption or safe harbor. An issuer that does not rely on Rule 400 may alternatively take the position that its crypto asset is not an investment contract.
  • The Investment Contract Safe Harbor does not require network decentralization per se. Instead, it requires fulfillment (or permanent cessation) of the issuer’s own stated promises. If an issuer promised to decentralize, it must demonstrate it did so, but the standard against which this is measured is the issuer’s own representations, not an abstract market standard of decentralization.
  • The Investment Contract Safe Harbor is available to any issuer, whether or not it previously relied on the Startup Exemption or the Fundraising Exemption.
  • The SEC retains the right to challenge whether an issuer actually satisfied Rule 400’s conditions. A Form TR filing is not a license. It is a public assertion subject to enforcement scrutiny.

Disclosure Framework (Rule 103)

Both the Startup Exemption and the Fundraising Exemption require principles-based disclosures tailored to crypto asset offerings. Required disclosure topics include:

  • Essential managerial efforts: The issuer’s representations or promises, progress toward fulfilling them, and a description of how the Covered Investment Contract may cease to exist
  • Issuer and related persons: Background, experience, crypto asset holdings, and compensation
  • Description of the crypto asset being offered: Technical characteristics, supply mechanics (including minting, burning, and inflation schedules), and any restrictions on transferability
  • Associated crypto network/application: Architecture, protocols, consensus mechanisms, functionality, and road map
  • Plan of development: Milestones, timeline, and resources dedicated to fulfilling the issuer’s representations
  • Security and source code: Material aspects of network security and a link to publicly available source code
  • Allocations and economics: Token allocation among insiders, investors, and the community; vesting schedules; and liquidity considerations
  • Governance: Smart contract governance, permissions, and upgrade mechanisms
  • Ecosystem: On-chain and off-chain participants, infrastructure, and interdependencies
  • Risk factors: Specific, non-generic risks related to the investment contract, issuer, crypto asset, and network

Practical Takeaways:

  • Regulation Crypto Assets is a proposed rule and not a final rule. The proposed rule is subject to a comment period, and the final rules could look materially different.
  • As noted above, Regulation Crypto Assets does not attempt to address the regulatory and operational challenges that broker-dealers and other custodians may face with respect to the custody of Covered Investment Contracts and the facilitation of secondary transactions of Covered Investment Contracts. For example, from a net capital requirement perspective (i.e., Rule 15c3-1), if a Covered Investment Contract has a liquid secondary market, should such Covered Investment Contract be subject to the net capital deductions of non-marketable securities? Additionally, if such Covered Investment Contract is not subject to a “haircut” and the Covered Investment Contract subsequently qualifies under the Investment Contract Safe Harbor, broker-dealers and other custodians may be subject to unnecessary challenges to comply with their net capital requirements.
  • The Startup Exemption is purpose-built for token launches. The combination of no resale restrictions, no accredited investor requirements, permission for general solicitation, and explicit accommodation of airdrops and staking distributions represents a realistic pathway for crypto projects to launch in compliance with federal securities laws, without the prohibitive costs and structural mismatch of existing exemptions.
  • The Fundraising Exemption provides a path for Covered Investment Contracts to raise capital in a Regulation A-like offering framework. However, the Fundraising Exemption departs from Regulation A in several key respects: (i) It permits offerings of Covered Investment Contracts (which are not eligible securities under Regulation A); (ii) it preempts state law for both Tier 1 and Tier 2 offerings; and (iii) eligible issuers must be U.S. entities, they must maintain a principal place of business in the U.S., and the majority of their officers and directors must be U.S. citizens or residents.
  • The Investment Contract Safe Harbor demands precision in how issuers describe their essential managerial efforts. Because Rule 400’s condition is measured against the issuer’s own representations and promises, the specificity with which an issuer articulates its road map and commitments at the outset will directly determine the clarity with which it can later demonstrate fulfillment. Issuers should work closely with counsel to ensure their initial disclosures under Rule 103(b)(1) are precise, achievable, and verifiable.
  • Existing crypto projects should evaluate their status now. The Investment Contract Safe Harbor, if adopted as proposed, will be available to any issuer, not just those that rely on the proposed exemptions. Projects that previously conducted token sales and believe they have fulfilled (or permanently ceased) their promised essential managerial efforts should consider filing a Form TR under Rule 400, upon adoption of Regulation Crypto Assets, which may provide the regulatory certainty they need.

Lowenstein Sandler has significant experience advising crypto asset issuers, trading platforms, broker-dealers, and other financial institutions on regulatory matters, including the application of the federal securities laws to digital assets. Please reach out to one of the listed authors of this Client Alert or your regular Lowenstein Sandler contact if you have any questions regarding Regulation Crypto Assets or its implications for your business.