Viewpoint: SEC's Proposed 'Cryptocurrency Asset Regulation' May Not Trigger a New ICO Frenzy

BlockBeats News, August 26th. On August 18th, the U.S. SEC published the proposed rule "Regulation Crypto Assets," which sets two exemptions for specific investment contracts involving crypto assets: one allowing startups to raise up to $5 million in a single round of funding over a 4-year period; the other permitting qualifying issuers to raise up to $75 million in any 12-month period and potentially conduct additional rounds of fundraising in subsequent years.

Winston & Strawn partner Drew Hinkes stated that as long as each fundraising round is truly a separate offering, a project could theoretically raise $75 million every 12 months. However, Sidley's Fintech and Blockchain Practice leader Lilya Tessler pointed out that subsequent fundraising is not automatic. Issuers must resubmit offering documents, undergo SEC staff review, continue to file annual and semi-annual reports, disclose funds raised under the exemption in the past 12 months to ensure they stay within the limits.

The proposed rule also restricts the participation of non-accredited investors, capping their investment at 10% of the greater of their annual income or net worth. Duke University's financial regulation expert Lee Reiners believes the limited first-round cap may make early token allocations more attractive, but this rule is unlikely to replicate the ICO frenzy of 2017. Previous ICOs have already impacted investor confidence, with up to 90% of projects funded through ICOs between 2017 and 2019 ultimately failing.

The SEC estimates that around 130 offerings per year will utilize the two exemptions, and approximately 475 issuers may take advantage of the broader Investment Contract Safe Harbor. The new rules will provide token issuers with a clearer U.S. fundraising path than the current regime, but secondary market trading may still face uncertainties regarding securities status.

The proposal states that investment contracts related to crypto assets can continue to be transferred along with the tokens in secondary market transactions until the asset becomes separated from the statements or commitments of the issuer. Hinkes mentioned that even if a non-security token's investment contract transfers from seller to buyer, the trade may still be deemed a securities transaction and impact trading platforms. Reiners also warned that some issuers may meet the form requirements of the exemption but still influence token value through team management efforts, concentrated insider holdings, and aggressive promotion.