Earlier this week, the Securities and Exchange Commission (SEC) announced new proposed rules for issuers to raise capital under new exemptions for crypto assets. Regulation Crypto Asset (Reg CA) is widely modeled after two existing securities exemptions, Reg CF and Reg A.
Reg A and Reg CF were created by the JOBS Act of 2012. They are two of the three exemptions that allow for online capital formation – the other being Reg D 506c.
Under Reg CF, an issuer can raise up to $5 million from anyone in an online securities offering. The documents submitted to the SEC before relying on the exemption are a fairly simple notice filing and do not need to be qualified by the SEC.
Under Reg A, an issuer may raise up to $75 million (Tier 2), but the SEC must qualify the offering documents.
Of course, both exemptions have other requirements, but the SEC said it is mirroring these two exemptions for Reg CA offerings: one for startups and one for larger offerings.
The Startup Exemption allows for a crypto offering of up to $5 million in aggregate over four years. This may be used only once.
There is a required Transition Report or Form TR that must be submitted no later than four years after the Notice of Reliance the issuer must make to begin using the Startup Exemption
No financial statements are required. Securities are not restricted and face no rule-based resale restrictions; general solicitation is permitted; the exemption itself does not limit sales to retail/non-accredited investors. The issuer may be an individual, group, or entity. The exemption is a temporary “regulatory runway” while the issuer works to fulfill its objectives, which likely include decentralization.
The Fundraising Exemption has two tiers for issuers: Tier 1 up to $20 million and Tier 2 up to $75 million may be raised over a 12-month period. Tier 2 issuers must have an offering statement qualified by the SEC. Tier 2 requires audited financial statements.
Both Startup and Fundraising require forms of ongoing reporting, but the Startup requirement is limited. Neither requires an intermediary.
While the proposal could change before it goes into effect, the rules are pretty hardened. What will inevitably happen is that existing securities crowdfunding platforms will offer these crypto exemptions to stay relevant and competitive.
Below is a comparison table for Reg CA and Reg CF/ Reg A.
