The United States Securities Commission (SEC) has proposed a new draft regulation for the encryption industry, which focuses on tokens identified as securities or investment contracts. The draft contains a 60-day public consultation period covering financing exemptions, information disclosure requirements, and how a token is disassociated from the identity of the securities when the conditions are met.

Currency securities still follow existing standards

In the draft, the SEC indicated that if the main expected gain was from the efforts of a central team when investors purchased the tokens, such tokens would still be treated as securities. This judgement follows the approach of howey testing that is now in place in the United States.

At the same time, the draft recognizes that the implementation of registration, disclosure and auditing under the traditional securities rules is costly for many encryption start-ups and has obstacles to practical operation. Therefore, the SEC proposed a limited compliance exemption window for some projects.

Finance exemptions are in two tranches.

According to the draft, small start-up projects can be financed in a one-time issuance of up to $5 million over four years and are exempted from the standard registration process of the Securities Act of 1933, if conditions are met.

The financing ceiling for larger-scale projects is $75 million per year, subject to mandatory financial audit and more detailed reporting. If these time or amount arrangements are exceeded, the relevant currency will continue to be subject to the regular SEC securities regulatory requirements.

  • Small-scale projects: one-time financing cap of $5 million over four years
  • Large-scale projects: ceiling on funding in one year $75 million
  • Beyond the period of time: Continued application of standard securities law requirements

Go to center as an exit path

The draft requires the project team to provide “principle-oriented” narrative disclosure, describing the project source code, organizational structure, token economic model, road map and core team profile in common language. Anti-fraud and anti-market manipulation provisions will continue to apply.

The draft also proposes that, if the project is fully decentralized, the relevant currency may no longer be treated as securities. The criteria for judgement include the absence of centralized control, the independent functioning of governance, the sufficiently dispersed distribution of nodes, and the fact that currency prices are primarily driven by the use of value rather than relying on centralized team marketing.

If this framework is finally put on the ground, federal-level rules may also take precedence over cantonal securities requirements and reduce the project ' s compliance burden by both state and federal law. SEC Commissioner Hester Peirce stated that the rules should be followed by law-abiding participants without the need for them to give up their legitimate business.

Additional information:As mentioned in the original version, the United States regulators and the Office of the President-related personnel are scheduled to meet the following day and the market is watching to see if more encrypted regulatory signals will be released.