For a decade, a development team that wanted to distribute tokens in the U.S. or to U.S. persons had two realistic options: attempt an SEC registration that, basically, no one could complete, or make a judgment call under the 1946 Howey case and hope not to be second-guessed by an adversarial SEC.

But now the SEC’s “Regulation Crypto Assets” proposal offers other pathways that build on an interpretation that the SEC and CFTC jointly released earlier this year.

If adopted, the rules proposed in August would create workable exemptions from Securities Act registration for token offerings, a safe harbor for declaring that an investment contract has ended, and broad preemption of state registration and qualification requirements. They would also leave for another day challenging regulatory compliance questions for exchanges, broker-dealers, and custodians.

Commissioner Mark Uyeda’s separate statement captured why this matters. Under prior leadership, he wrote, issuers who tried to comply “found themselves facing subpoenas and litigation rather than answers.” The proposal would replace “regulation by enforcement” with fixed thresholds and defined disclosure obligations that teams can measure themselves against before committing to an offering.

Here is what practitioners need to know and where the proposal leaves room for more.

Two New Exemptions

Both apply only to “covered investment contracts”—investment contracts where the only asset subject to the contract is a crypto asset that is not itself a security. Offerings of equity, debt, or other securities cannot use them.

The “startup exemption” permits up to $5 million in covered transactions over four years. The issuer files a notice of reliance on Form NOR before the first transaction, posts principles-based disclosure at a specified website free of charge for users, updates it annually and files a transition report on Form TR at the end.

The scope of this exemption is deliberately broad. It covers conventional capital raising, but also airdrops, staking and governance rewards, “gas” distributions, and testing compensation. The issuer can be an entity, an individual, or a group and need not be a U.S. person. But the exemption is available only once for the same or a substantially similar crypto asset.

The “fundraising exemption” is modeled on SEC Regulation A, as I and others recommended to the SEC, and permits up to $75 million in 12 months, with Tier 1 capped at $20 million and Tier 2 at $75 million. An issuer files an offering statement on new Form 1-CRYPTO, may test the waters, and becomes subject to ongoing annual, semiannual, and current reporting on Forms 1-KC, 1-SC, and 1-UC.

Unlike the startup exemption, the fundraising exemption requires U.S. organization and substantial U.S. contacts. Non-accredited investors face a 10% income-or-net-worth cap. And Tier 1 issuers also report continuously because the SEC expects secondary markets to develop.

One easily missed footnote states that the SEC does not view covered investment contracts as equity securities and thus does not consider them subject to Exchange Act Section 12(g). This means that Exchange Act issuer registration will not be required for using these exemptions.

Disclosure Is the Investor Protection Lever

Proposed Rule 103 requires narrative disclosure across 10 topics: the terms of the covered investment contract and the issuer’s promises; management, related persons, and conflicts; the associated network’s architecture, protocols, and plan of development; source code and security, with a link; token economics and allocation; governance; the token ecosystem; and risk factors.

The requirements are principles-based rather than prescriptive, designed concurrently to compel disclosure of material information and permit omission of immaterial information.

That flexibility comes at a price. Form 1-CRYPTO and the ongoing reports will create a detailed public record. Alleged inconsistencies among filings, the team’s white paper, social media posts, and actual project performance could support SEC and state antifraud and antimanipulation enforcement, as well as private litigation.

The Safe Harbor and Form TR

Proposed Rule 400 provides that a covered investment contract ceases to exist, and the token is no longer subject to it for Securities Act and Exchange Act purposes, if the issuer has completed or permanently ceased all promised essential managerial efforts, is making no new promises, and files a Form TR containing an analysis supporting that certification.

The safe harbor is non-exclusive. The SEC says so expressly. A token can fall outside investment contract status without Rule 400 for several reasons: because one or more Howey elements were never present, because the contract ended under ordinary principles without a filing, or because a secondary transaction between unaffiliated parties neither involves the original contract nor creates a new one. That last scenario is typical of most exchange trading.

Still, operating outside the harbor means operating without certainty. Opinions of counsel and no-action relief reduce risk but bind neither private plaintiffs nor state regulators.

Preemption, Within Limits

Proposed SEC Regulation Crypto Assets would preempt state registration and qualification requirements for primary offerings under both exemptions and also for secondary market transactions in the same covered investment contract regardless of how it was originally offered.

But not all state regulation would be pre-empted. The states would retain authority over fraud and deceit and over unlawful broker-dealer conduct, may require notice filings and fees, may suspend offers for filing failures, and may continue to regulate under money transmission, tax, and other non-securities-law regimes.

What the SEC Proposal Does Not Do

Regulation Crypto Assets facilitates token issuance without creating a regulated market in which the tokens can trade. Nothing in the proposal resolves the federal registration and compliance problems facing exchanges, brokers, dealers, clearing agencies, and custodians handling covered investment contracts.

It would be unfair to fault this SEC for its inability to solve everything at once, particularly after a full decade in which prior management chose enforcement over rulemaking. But more work certainly lies ahead.

There is a durability question. As Chairman Paul Atkins acknowledged in calling for passage of the CLARITY Act, legislation remains indispensable to rules that can survive “a future rogue regulator.” After Loper Bright Enterprises v. Raimondo, courts will independently assess the SEC’s authority rather than defer to a reasonable construction. Be alert for possible challenges to the fundraising exemption, the definition of “qualified purchaser,” state preemption, and the conclusive effect of Form TR certification.

Practice Points for The Interim

Whatever the final rules look like, legal counsel advising token issuers should be thinking now about several features of the proposal that create planning problems.

Watch the communications record before Form NOR. The startup exemption has no testing-the-waters provision. That exemption runs from the date that Form NOR is filed, so a white paper, roadmap, conference presentation, governance forum post, or social media thread published earlier could be characterized as an “offer” made outside the exemption. The practical implication is that entity formation, counsel engagement, and the NOR filing need to come earlier in a project’s life than most founders expect. Project teams should engage legal counsel before they err accidentally, and legal counsel inheriting a project mid-stream should audit what is already public.

Model integration before layering offerings. Protocol rewards are continuous by design. A team might want a startup-exemption distribution running in the background, a concurrent Regulation D institutional round, and a later fundraising-exemption offering. The proposal does not squarely address how those interact. Integration uncertainty could push a project past the $5 million cap or complicate an otherwise clean private placement. Until there is guidance, conservative sequencing is worth more than it costs.

Check the organizational structure against the fundraising exemption. The startup exemption does not require the issuer to be a U.S. person. The fundraising exemption does require U.S. organization plus several other U.S. contacts. Given how many projects are built around offshore foundations, this is a structuring decision with tax, governance, and control consequences that should be made before, not after, a project outgrows the $5 million runway.

Filing Form TR is a strategic decision, not a ministerial one. The form presupposes that a covered investment contract existed and asks the issuer to explain how it ended. For an issuer that has consistently maintained that there never was an investment contract, that filing is uncomfortable as it could be used later by adversaries as an apparent admission. Declining to file, on the other hand, may invite the market to infer that “security” status persists. There is no clean answer under the proposal as drafted. The decision belongs in a litigation-risk conversation with expert counsel rather than a compliance checklist.

A filed Form TR protects the issuer, not the counterparty. Rule 400 gives no express reliance protection to an exchange, broker, dealer, custodian, adviser, fund, or purchaser transacting on the strength of a public Form TR. If the SEC later concludes that the certification was wrong—even unintentionally—it could take the position that the contract never ceased to exist and that intervening trades involved unregistered securities for which registration was required. Intermediaries should not treat a Form TR as a mere diligence checklist item. Representations, indemnities, and independent analysis still matter.

Provenance remains unresolved. Units of a fungible token may enter circulation through a Regulation Crypto Assets exemption, Regulation D, Regulation S, protocol rewards, or transfers involving no investment contract at all. In secondary markets they are indistinguishable from one another, and a platform or purchaser generally cannot reconstruct a particular unit’s history. Whether legal treatment can turn on that history is a question the proposal leaves open.

Assume the disclosure record will be read by adversaries. The filings described above are exactly what enforcement staff and plaintiffs firms will mine for inconsistencies. Two habits reduce exposure: draw a hard line between what the network does today and what it is planned to do—a distinction central to Howey analysis—and identify the assumptions behind any projected milestone. The forward-looking statement protection in the proposal will not save a statement that lacked a reasonable basis.

Looking Ahead

The proposing release asks 154 numbered questions, an unusual signal that the SEC regards significant elements of the framework as still open. The scope of the exemptions and the operation of the safe harbor could shift between proposal and adoption.

For now, though, the direction of travel is clear enough to plan around. Teams that seek to raise capital in the U.S. or from U.S. persons should be structuring, sequencing, and documenting on the assumption that some version of these rules takes effect and that the disclosure record that they build in the meantime will be scrutinized by potential adversaries.

Comments on proposed Regulation Crypto Assets may be submitted to the SEC via rule-comments@sec.gov, referencing File No. S7-2026-27 on the subject line, through October 20.

Patrick Daugherty is a senior partner at the law firm of Foley & Lardner LLP, where he chairs its blockchain and digital assets practice. He also is an SEC-appointed member of the SEC Investor Advisory Committee. The views expressed in this post are his alone, and he does not purport to speak for the committee or for Foley or any of its clients.