Regulation Crypto Assets: SEC Proposes Capital Raising Onramp and Regulatory Offramp for Digital Assets

On August 18, 2026, the U.S. Securities and Exchange Commission (the “SEC”) published a long-anticipated proposal to create a new regulatory framework for certain investment contracts involving crypto assets. The proposed “Regulation Crypto Assets” would establish (i) two offering exemptions under the Securities Act that are tailored to crypto assets subject to an investment contract, (ii) related disclosure and filing requirements, (iii) a safe harbor offering a conditional pathway for a crypto asset to cease being treated as subject to an investment contract, and (iv) federal preemption of state registration and qualification requirements. If adopted, the new framework would provide an SEC-compliant pathway for digital asset projects to raise capital by issuing tokens rather than traditional securities, which developers, promoters and market participants have called for over many years. The proposal does not address key issues relating to the custody, exchange trading, or role of financial intermediaries with respect to digital assets that are explicitly securities. Below we discuss Regulation Crypto Assets in further detail.

Key Features of Regulation Crypto Assets

The Startup and Fundraising Exemptions: Preliminary Requirements and Principles

The proposed rule would create two categories of offering exemptions for covered investment contracts: the Startup Exemption, which is a one-time exemption that permits offerings of up to $5 million over a four-year period, and the Fundraising Exemption, which is organized into two tiers to facilitate offerings of up to $20 million and $75 million over a 12-month period, respectively. The availability of both the Startup Exemption and the Fundraising Exemption are premised on several key principles and requirements:

• Only Applicable to Covered Investment Contracts. The proposed exemptions would only be available for a “covered investment contract,” which is defined as a contract, transaction, or scheme involving a crypto asset that constitutes an investment contract, and that meets the following requirements: (1) the crypto asset is subject to the investment contract; (2) such crypto asset is not a security; and (3) no asset other than such crypto asset (including any security or other non-security asset) is subject to the investment contract.[1] Therefore, the proposed exemptions would be unavailable for digital securities, traditional equity or debt securities, or investment contracts that involve any asset other than a non-security crypto asset.
• Public Disclosure. As proposed, issuers would be required to provide disclosure about the issuer, the subject crypto asset and the associated crypto network or associated crypto application, including information about the following:
  • The covered investment contract, including the issuer’s representations or promises to undertake essential managerial efforts and its progress with respect to such representations or promises;
  • The offering terms and contemplated distributions;
  • The subject crypto asset, its characteristics and its relationship to the associated crypto network or application;
  • Management, related persons and conflicts of interest;
  • The associated network or application and the plan of development, including the issuer’s progress with respect to its plan of development;
  • Security, source code and related technical matters;
  • Crypto asset economics and allocations;
  • Governance arrangements;
  • The broader ecosystem for the subject crypto asset; and
  • Material risk factors.

  As discussed in further detail below, this disclosure would be published on an issuer’s website, if the issuer is relying on the Startup Exemption, or filed with the SEC, if the issuer is relying on the Fundraising Exemption.

• Bad Actor Prohibitions and Disclosure. The exemptions are not available if “bad actor” disqualification events under Regulation A Rule 262 occur after the adoption date of Regulation Crypto Assets. Bad actor events that occurred prior to the adoption date must be disclosed to each purchaser.

Below we discuss the specific provisions of the Startup and Fundraising Exemptions in further detail.

The Startup Exemption: One-Time Up to $5 Million Over Four Years

The Startup Exemption is designed as a temporary registration exemption intended to give an early-stage crypto project a defined runway to raise capital to carry out the essential managerial efforts represented or promised to investors. The exemption would permit issuers to raise capital in one or multiple public or private offerings subject to an overall aggregate offering cap of $5 million over the four-year exemption period. Principal features of the exemption are as follows:

• Four-Year Duration. The exemption would be available for a period of up to four years and is triggered when an issuer files a notice of reliance with the SEC on Form NOR. At the end of the four-year period, or sooner if the issuer wishes to cease relying on the offering exemption, the issuer must file a transition report on Form TR with the SEC.
• One-Time Use. The exemption can only be used for one four-year period by the issuer or its affiliates with respect to the same or a substantially similar crypto asset.
• Flexible Definition of an Issuer. An eligible issuer could be an entity, an individual, or a group of individuals or entities.
• Offering Limit. The exemption is capped at $5 million, measured by the aggregate offering price of the current offering (including non-cash consideration) plus gross proceeds from all relevant offerings completed before and during the current offering.
• Public Disclosure. In addition to filing a reliance notice on Form NOR and the transition report on Form TR with the SEC, the issuer is required to provide the disclosures described above. The disclosures must be publicly accessible and free of charge at the website identified in the notice. At the end of each calendar year an issuer is required to assess whether there have been any material changes to the information previously disclosed. If there have been material changes, the disclosure must be updated within 30 days of the calendar year end.
• Airdrops and Other Non-Traditional Distributions Permitted. The exemption permits airdrops and other non-traditional distributions of covered investment contracts, including as an incentive for past or future use of an associated crypto network or associated crypto application, or as a reward for conducting activities primarily related to operating, governing, or securing the network or application.
• Non-Accredited Sales and General Solicitation Permitted. The exemption permits sales to non-accredited (in addition to accredited) investors and general solicitation.
• Not Restricted Securities. Covered investment contracts issued under the exemption would not be restricted securities or otherwise subject to rule-based resale restrictions.

The Fundraising Exemption: Up to $75 Million Under Two-Tier Framework

The Fundraising Exemption is modeled on Regulation A’s two-tier framework and would permit larger capital raising transactions, including delayed or continuous offerings (although at-the-market offerings are not permitted). Unlike the relatively broad issuer eligibility requirements of the Startup Exemption, the Fundraising Exemption is only available to entities organized under U.S. law and with other U.S. connections (a majority of executive officers or directors need to be U.S. citizens or residents, more than 50 percent of the issuer’s assets need to be located in the United States and the issuer’s business needs to be administered principally in the United States.). Business development companies and investment companies registered under the Investment Company Act of 1940 are ineligible to use the Fundraising Exemption, among others. In addition, companies that are subject to reporting obligations under Regulation Crypto Assets or the Exchange Act are required to have filed all reports required to be filed in the two years preceding the filing of the offering statement.

In order to qualify for the Fundraising Exemption, an issuer must prepare and file an offering statement on Form 1-CRYPTO with the SEC. Form 1-CRYPTO is modeled on Form 1-A and includes an offering circular that incorporates the non-financial disclosures discussed above, a narrative discussion of financial condition covering liquidity, capital resources, historical results and known material changes or trends, and financial statements prepared in accordance with U.S. GAAP (which must be audited for Tier 2 offerings), among other requirements. The offering statement may be submitted in draft confidential form to the SEC staff and must be qualified by the SEC before sales can occur. “Testing the waters” communications with potential investors are permitted. The exemption includes limitations for sales by affiliated selling security holders and to non-accredited investors, as described in the table below. After an offering statement is qualified, both Tier 1 and Tier 2 offerings are subject to ongoing annual, semiannual, current and exit reports.

The Investment Contract Safe Harbor

The proposed rule includes a conditional safe harbor from the term “investment contract” in the Securities Act and Exchange Act definitions of a “security.” If the conditions of the safe harbor are met, the covered investment contract is deemed to have ceased to exist and the associated crypto asset not to constitute, represent or be subject to that former covered investment contract. The safe harbor is intended to solve one of the more longstanding securities regulatory issues in the digital asset space, namely how to determine if and when a digital asset sold as part of an investment contract ceases to represent an investment contract at a later stage when the platform underlying the digital asset has become fully developed and the asset has utility on that platform.

The requirements of the safe harbor are as follows: (1) the issuer of the covered investment contract has completed or otherwise permanently ceased all essential managerial efforts that it represented or promised it would engage in under the covered investment contract and 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, and (2) the issuer files a transition report on Form TR with the SEC certifying the representation in (1). Importantly, the Form TR requires an analysis supporting the issuer’s determination that the covered investment contract has ceased to exist, which will be public and may be subject to future challenge or scrutiny from the SEC, investors, or others.

Federal Preemption of State Registration and Qualification Requirements

The proposed rule adds a new definition of a “qualified purchaser” under Securities Act Section 18(b)(3) so that offers and sales of covered investment contracts under Regulation Crypto Assets, and specified secondary transactions, would be treated as covered securities for purposes of state registration and qualification preemption. Secondary market preemption continues for the period during which the issuer satisfies the information and filing or periodic reporting requirements of an exemption under Regulation Crypto Assets for the covered investment contract. As noted above, other state-law requirements and federal antifraud and antimanipulation provisions would continue to apply.

Conclusion

Regulation Crypto Assets represents an important step in the SEC’s ongoing efforts to establish a tailored regulatory framework for digital assets. Covington, one of the few law firms with both nationally recognized securities law and financial services law practices, has extensive cross-disciplinary experience advising public companies and financial institutions on digital asset matters. For assistance in preparing for Regulation Crypto Assets, submitting a comment letter on the proposed rule, or if you have any questions concerning the material discussed in this client alert, please contact any of the following members of our Securities and Capital Markets and Financial Services practices.