SEC's Crypto Asset Regulation Proposal Sparks Both Opportunities and Risks

The Securities and Exchange Commission (SEC) has proposed Regulation Crypto Assets, which would provide two fundraising pathways for companies dealing with crypto assets that are not themselves securities. The regulation would allow startups to raise up to $5 million over four years through a one-time exemption, or up to $20 million in Tier 1 offerings or $75 million in Tier 2 offerings within a 12-month period.

The proposal also includes a safe harbor for issuers, which would protect them from private securities litigation if they file a transition report explaining why and certifying that they have completed or permanently stopped the essential managerial work promised. However, this could potentially create opportunities for private securities litigation on several fronts, including claims of materially misleading statements or omissions in disclosure documents or transition reports.

Companies looking to utilize the proposed exemptions or safe harbor may want to carefully address issues such as pathway selection, disclosure accuracy and consistency, and transition report planning. They should also be mindful that the transition report could have litigation implications and evaluate measurable endpoints for managerial commitments.