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On August 18, 2026, the Securities and Exchange Commission proposed Regulation Crypto Assets, its first comprehensive rulemaking on the offer and sale of crypto assets. Proposed while the CLARITY Act remains stalled in Congress, the rules would build a tailored exempt-offering regime alongside — rather than inside — the Securities Act registration process, and would supply, for the first time, an administrative mechanism by which a crypto asset ceases to be treated as, or as representing, an investment contract.
Releases: Securities Act Rel. No. 33-11434; Exchange Act Rel. No. 34-106150 (Aug. 18, 2026), File No. S7- 2026-27. Comments are due 60 days after publication in the Federal Register.
The Gating Concept
The regime does not reach crypto assets generally. It reaches what the release calls a covered investment contract — an investment contract in which the asset that is its subject is a crypto asset, that crypto asset is not itself a security, and no other assets are involved. The Commission is regulating the capital-raising transaction around a network token, not converting the token into a registered security. This definitional gate is the most consequential feature of the proposal for issuer-side planning.
The Two Exemptions
Startup Exemption. Up to $5 million of covered investment contracts over a four-year period, conditioned on principles-based narrative disclosure to investors and public filings at the beginning and the end of the period. It is designed as breathing room for a development-stage team working toward the managerial efforts it has promised.
Fundraising Exemption. Modeled substantially on Regulation A and two-tiered: Tier 1 permits up to $20 million during each 12-month period with narrative disclosure and a discussion of financial condition; Tier 2 permits up to $75 million during each 12-month period, adding audited financial statements and ongoing periodic reporting patterned on the Regulation A cycle. Filings would be made on EDGAR using a new crypto-specific form family (the release refers to Form 1-CRYPTO for the offering statement and to forms in the 1-KC, 1-SC and 1-UC series). Both exemptions would be conditioned on satisfying “bad actor” disqualification standards drawn from Rule 262(a) of Regulation A. Antifraud and antimanipulation provisions continue to apply in full.
The Investment Contract Safe Harbor The proposal’s most structurally significant element is a conditional safe harbor from the statutory definition of “security.” Where an issuer has completed — or permanently ceased — all essential managerial efforts it represented or promised it would undertake, makes no new such commitments, and files a public certification supported by its analysis, the crypto asset would be deemed not to constitute or represent the investment contract for purposes of the Securities Act and Exchange Act definitions of “security.” This is the administrative articulation of the long-discussed idea that an investment contract can be consumed by performance while the underlying asset persists.
State Law Preemption State registration and qualification requirements would be preempted both for primary offerings made under the exemptions and for certain secondary market transactions in covered investment contracts, with secondary preemption continuing so long as the issuer remains current in its Regulation Crypto Assets reporting. States retain antifraud authority. This is materially broader than Regulation A, under which Tier 1 offerings remain subject to state review.
Where the Commission Stands Chairman Atkins framed the proposal as ending an era in which crypto was forced into a “square peg in a round hole” disclosure system and driven offshore by “regulation by enforcement and disingenuous offers to ‘come in and register.’” Commissioner Peirce called it “one step on a long road,” and expressly solicited comment on structures in which a crypto asset functions “akin to equity to enable token holders to share in the growth and value of the enterprise” — a signal worth tracking, because that is precisely the design space a public company would want to occupy. Commissioner Uyeda emphasized the shift from enforcement to rulemaking. All three acknowledged that legislation remains the durable answer.
A CLOSER LOOK: CAN A SMALL PUBLIC COMPANY USE THE FUNDRAISING EXEMPTION TO AVOID REGISTRATION STATEMENT REVIEW?
Why the question is being asked For a small reporting company, the friction in a registered offering is rarely the disclosure itself — it is the process and the structural caps around it. A first- time or non-S-3-eligible issuer files a Form S-1 and enters a comment cycle that routinely runs two to four rounds over several months, with acceleration timing that cannot reliably be promised to an investor. An S- 3-eligible issuer with a public float below $75 million is confined by the “baby shelf” limitation in General Instruction I.B.6 to one-third of float in any 12-month period. Add Nasdaq Rule 5635(d) and its NYSE American equivalents for 20% issuances below the minimum price, and the practical ceiling on a small-cap equity raise is often well below what the business needs. Against that backdrop, a $75 million annual exempt channel with federal preemption of state review and no equity dilution is, on its face, very attractive. The analysis, however, turns almost entirely on eligibility rather than on the cap.
This is not a tokenized-equity exemption
As proposed, the Fundraising Exemption reaches only covered investment contracts — arrangements in which the underlying asset is a crypto asset that is not itself a security. A tokenized share of common stock, a tokenized note, a tokenized preferred unit, or a token whose economics replicate equity participation is a security in its own right and falls outside the definition. A public company cannot simply place its existing capital structure on a ledger and raise $75 million outside Section 5.
The practical consequence: the exemption is available to a small public company only if that company is genuinely originating a network-based, non-security crypto asset — a protocol token, an access or usage credential, or a similar instrument tied to functionality the company is building. It is a product- development question before it is a capital-markets question, and clients who approach it in the reverse order will build a structure that fails the definitional gate.
What a compliant pathway would look like
1. Confirm the asset itself is not a security. This is an independent Howey and Reves analysis of the token, separate from the offering. The proposal exempts the offering of the investment contract; it does not bless the asset.
2. Define the “essential managerial efforts” with precision. Because the safe harbor exit is keyed to completing or permanently ceasing the efforts the issuer represented, the promise made at the offering stage becomes a binding roadmap. Draft it as something the company can actually finish.
3. Select the tier. Tier 2 is the realistic choice for a reporting company — audited financials already exist, and Tier 1’s $20 million cap will rarely justify the build.
4. File the offering statement on EDGAR using the new crypto form, with narrative disclosure deliberately reconciled to the company’s existing Exchange Act reports.
5. Run parallel Exchange Act compliance. The Regulation Crypto Assets reporting stream sits alongside, not in place of, Forms 10-K, 10-Q and 8- K.
6. Plan the safe harbor certification at the outset, not years later — the certification is what ultimately frees secondary trading from the investment contract overlay.
Diligence points that will decide whether this is usable
• The “permanently ceased” problem. The safe harbor is built for a development team that hands a protocol to a decentralized community and steps back. An operating public company with a board, an investor relations function and a going-concern obligation is, by design, never done managing. Structuring an exit from essential managerial efforts without abandoning the business line is the hardest drafting problem in this regime, and may require a subsidiary or foundation structure with all of the consolidation, control and disclosure questions that follow.
• Disclosure consistency and Regulation FD. Token disclosures — roadmaps, supply schedules, adoption projections — are far more forward- looking than typical Exchange Act disclosure and will be read against the company’s risk factors. Whether the crypto filings are “filed” or “furnished,” whether they carry PSLRA safe harbor protection, and whether a roadmap update triggers a simultaneous-disclosure obligation are all live questions. Assume for now that anything material said to token purchasers must be broadly disseminated.
• Integration. A token offering conducted while a shelf takedown or Regulation D placement is in the market raises the general Rule 152 integration framework. Whether Regulation Crypto Assets carries its own integration safe harbor — as Regulation A and Regulation Crowdfunding do — should be confirmed against the release, and is in our view a priority comment topic for issuer-side commenters.
• Liability profile. There is no registration statement, so there is no Section 11 strict-liability claim and no due diligence architecture built around one. That is a real benefit. But Section 10(b) and Rule 10b-5 apply in full, the release preserves antifraud and antimanipulation authority, states retain fraud jurisdiction, and Section 12(a)(2) exposure for a public offering conducted on prospectus-like disclosure should be assumed rather than assumed away.
• Audit and accounting. Tier 2 requires audited financials; whether PCAOB or AICPA standards govern should be confirmed. Separately, the treatment of token sale proceeds — deferred revenue, contract liability, or something else — and fair value measurement of retained holdings under ASU 2023-08 will drive how the raise appears in reported results. A raise that is capital in substance may not be equity in presentation.
• Tax. Unlike an equity issuance, token sale proceeds may be includible in income on receipt. For a company raising against operating losses this may be manageable; for a profitable issuer it can materially change the cost of capital.
• Listing rules and equity-linked features. A pure utility token issuance does not implicate Nasdaq Rule 5635(d), a genuine advantage. Add a conversion feature, a warrant, a revenue share or any equity-linked economics, however, and the instrument likely becomes a security — losing the exemption and picking up the shareholder approval requirement at the same time.
• Section 12(g) and holder counts. Token distributions can generate very large holder populations quickly. The Exchange Act registration consequences, if any, of a broadly held covered investment contract warrant confirmation.
Our assessment For most small public companies, the Fundraising Exemption is not a substitute for a registration statement. The definitional gate means the exemption cannot be used to sell an interest in the company’s enterprise value, which is what a capital raise ordinarily is. Where the exemption is genuinely powerful is for the subset of issuers with a real network or protocol product: for them it opens a $75 million annual channel with federally preempted state review, no shelf-capacity limitation, no dilution of the common, and an eventual path to unrestricted secondary trading through the safe harbor certification. That combination has no analogue in the current exempt offering landscape. Companies without that product should read Commissioner Peirce’s request for comment on equity-like token structures as an invitation — and should consider filing one.
Open Items to Watch
• Whether the Fundraising Exemption is self- executing upon filing or requires Commission qualification on the Regulation A model — the single most important practical variable, since a qualification requirement reintroduces the very staff review cycle the exemption is meant to avoid.
• Eligibility of Exchange Act reporting companies, and whether reporting-company status carries modified conditions. • Integration with concurrent registered and Regulation D offerings.
• Whether the safe harbor certification can survive continued operating involvement short of control.
• Interaction with the CLARITY Act should it advance, and the durability of the rules if it does not.
Recommended Next Steps
1. Do not rely on the proposal. This is a proposing release, not a rule. Offerings launched now remain subject to existing law.
2. Calendar the comment deadline — 60 days after Federal Register publication — and identify whether the client has a position worth submitting on File No. S7-2026-27.
3. For clients with an existing or planned token, begin the non-security analysis of the asset now. It is the gating item and it is independent of the rulemaking’s outcome.
4. For clients considering a raise in the next two quarters, plan on the conventional path — S-1, S-3 takedown, Regulation D or Regulation A — and treat Regulation Crypto Assets as a 2027 alternative at the earliest.
DL partner Jacqueline J. Drohan is available to provide you with strategic advice and counsel. If you have any questions about Regulation Crypto Assets or its implications for your capital-raising plans, please reach Ms. Drohan at jdrohan@dlkny.com or (212) 710-0004.
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Download the Original Legal Alert (PDF)
Read the original Drohan Lee LLP legal alert, published August 19, 2026.
