The United States Securities and Exchange Commission (SEC) has proposed a draft regulatory framework for encrypted assets that seeks to establish a clearer compliance path for financing digital assets projects in the United States. The proposal is still in the process of being consulted and the content of the formal rules may be subsequently adjusted.
Inclusion of two financing exemptions in the draft
The draft was named “Regulation Cripto Assemblys”. The SEC indicated that the programme would establish a more targeted securities regulatory regime for investment contracts that partially involve encrypted assets, while maintaining the investor protection requirements under the Federal Securities Act while lowering the financing threshold.
The draft proposes two new exemptions for the registration of securities: one allowing the issuer to finance up to $5 million over four years and the other allowing the issuer to finance up to $75 million within an arbitrary period of 12 months.
Even when exemptions apply, the issuer must fulfil its obligation to disclose the information. In the case of a higher exemption arrangement, the project party is also required to submit financial statements and to assume ongoing reporting requirements.
Safe harbour involves security attribute
The SEC also proposed a conditional safe harbour arrangement. According to the draft, if the issuer has completed, or permanently ceases, the key management of the investment contract to which it is committed, and other conditions are met, the encrypted assets concerned may no longer be considered part of the “investment contract” in the future.
This design means that a part of the encrypted asset may be separated from the existing security recognition once the condition has been met. For project parties, this will affect the manner in which their subsequent issuance, circulation and compliance obligations are applied.
Some state requirements or exclusions
Another important element of the draft is the exclusion of some cantonal securities registration and qualification requirements. The rules at the federal level may prevail over the issuances made under the new regulations, as well as some related secondary market transactions.
According to the Chairman of the SEC, Paul Atkins, this proposal is intended to provide a clearer financing path for encrypted entrepreneurs and to encourage relevant innovations to remain in the United States.
According to the spokesperson for the SEC, the proposal was approved by means of a “seriatim”, i.e. members voted separately from the closed meeting. The proposal was scheduled to be considered in a public meeting on 14 August, but was cancelled due to scheduling issues.
According to the process, the draft will enter the 60-day public consultation period after its publication in the Federal Gazette. It is still a proposal, not a final rule.