Key Points
- The SEC’s recent proposal would create both startup and fundraising exemptions for certain investment contract offerings involving crypto assets.
- The proposed safe harbor would clarify when investment contract status ends for the purposes of the definition of a “security” under federal securities law.
- However, the required transition report could make room for private litigations.
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Two Offering Pathways and a Proposed Safe Harbor
The Securities and Exchange Commission’s (SEC’s) newly proposed Regulation Crypto Assets would provide a framework for covered investment contracts involving a crypto asset that is not itself a security.
If adopted, the regulation would provide for two fundraising pathways:
- A one-time startup exemption for up to $5 million aggregate of covered transactions over a period of up to four years for the same or a substantially similar crypto asset.
- A fundraising exemption that would permit Tier 1 offerings of up to $20 million and Tier 2 offerings of up to $75 million in a 12-month period.
However, the August 18, 2026, proposal may also open the door to private litigation relating to issuer promises and disclosures.
The proposal contemplates a safe harbor that would be available to issuers whether or not they utilize a fundraising exemption. The safe harbor would apply after an issuer has completed or permanently stopped the essential managerial work it had promised, is not making and does not intend to make new promises to perform such work, and has filed a required transition report explaining why and certifying that those conditions were met.
Potential for Private Securities Litigation
The SEC’s proposal, if adopted in its current form, could create opportunities for private securities litigation on several fronts.
First, the proposal expressly preserves private parties’ ability to argue that the crypto asset that is the subject of an offering remains tied to an investment contract or is otherwise a security after a transition report has been filed. Accordingly, purchasers of that crypto asset post-transition report filing could potentially bring suit alleging that their purchases were part of an unregistered offer and sale of securities under Section 12(a)(1) of the Securities Act of 1933.
In such a case, a court would be called upon to independently apply the statutory text and Howey test to determine whether the issuer actually completed or ceased all the essential managerial efforts it had promised. In such a scenario, although the transition report could strengthen an issuer’s defense, it could also potentially serve as evidence framing challenges concerning whether the issuer’s analysis matched its promises and actual conduct.
However, because what constitutes essential managerial efforts is often a fact-intensive inquiry, it remains to be seen how such claims would play out in court.
Second, private plaintiffs could potentially bring claims for materially misleading statements or omissions in the issuer’s disclosure documents or transition report under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. For example, the purchaser of a crypto asset under either pathway could possibly allege that the issuer materially misstated a key aspect of its business plan, leadership, or plans and promises with respect to the crypto project. Any plaintiff would need to satisfy all other elements of a Section 10(b) claim as well, including reliance and causation.
Moreover, plaintiffs could possibly challenge the issuer’s transition report as materially misleading by alleging the issuer had not, in fact, completed or permanently ceased all the essential managerial efforts it previously represented or promised it would undertake. Additionally, federal and state antifraud and antimanipulation rules would continue to apply.
Practical Considerations
Should the SEC’s proposal be adopted in its current form, companies looking to utilize the proposed exemptions or safe harbor may want to carefully address a number of important issues, including:
- Pathway selection. Consider capital needs, eligibility, timing, retail strategy, reporting capacity and cost.
- Disclosure accuracy and consistency. Review and align filings, websites, whitepapers, social media, technical materials and governance records.
- Transition report planning. Evaluate measurable endpoints for managerial commitments and evidence of completion or permanent cessation, remaining mindful that the transition report could have litigation implications.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.