SEC considers crypto fundraising rule change
The U.S. Securities and Exchange Commission is exploring a method for raising funds through crypto assets, bypassing equity or debt issuance. The proposed Regulation Crypto Assets (Reg CA) would permit entities to raise up to $5 million over four years or $75 million in any 12-month span.
To raise the higher amount, the issuer would need to provide financial statements and comply with federal securities law’s anti-fraud and anti-manipulation provisions. This new rule differs from alternative capital-raising methods, such as Regulation Crowdfunding, Regulation A, and Regulation D.
Crypto-Based Capital-Raising
Reg CA would permit companies to provide potential investors with principles-based financial disclosures, giving them flexibility in selecting which financial information to disclose. The intention is for issuers to focus on the substance of the information provided, rather than following a prescriptive list of required information.
Read Also: Gulf states bet big on Syria’s trade revival
The proposed rule does not include investment limitations for non-accredited investors, those with a net worth of less than $1 million excluding their primary residence. In contrast, Regulation Crowdfunding and Regulation A each cap the amount non-accredited investors can invest.
Investment Limitations
Regulation Crowdfunding limits non-accredited investors to $107,000 across all offerings in a 12-month period, or the greater of $2,500 or 5% of their net worth if their net worth is less than $124,000. Regulation A limits non-accredited investors to 10% of their net worth for Tier 2 offerings, but has no investment cap for Tier 1 offerings.
Regulation D permits the issuance of private securities in any amount, but only issuances of $10 million or less are available to a maximum of 35 non-accredited investors. The proposed Reg CA rule includes a safe harbor for investment contracts issued under the rule, if certain conditions are met.
Read Also: Bank of China Expands Green Finance Portfolio
Comment Period and Revisions
The comment period for Reg CA ends on October 20, after which the SEC will review the comments before possibly revising and finalizing the rule. Early comments on Reg CA do not reject the proposed rule, but stress addressing perceived design flaws, such as the suggested disclosure exemption concentrating a great deal of risk.
Tilden Moschetti, an attorney with Moschetti Syndication Law, noted that “none of the proposed safeguards carries the weight the release assigns to it.” Neil Osanto, founder of the Persistence Analytics Group, suggested that the SEC could strengthen its framework with a narrow distinction in its comment letter.
Benjamin Schiffrin, director of securities policy at public advocacy firm Better Markets, told Global Finance that the crypto industry should consider the federal securities law exemption a gift from the SEC. He added that “this is just, as I said, kind of a gift to crypto,” and that it tells you everything you need to know about the SEC’s approach to the crypto industry.
