SEC encryption new rule: the era of ex post punishment is over?

There's been a story in the currency ring these last few days that all of your friends have heard.Regulation of Encrypted Assets (Regulation Crystal Assemblys)The new proposal to establish registration exemptions under the Securities Act 1933 for investment contracts involving crypto assets was referred to by the Chairman of the SEC as “Pol S. Atkins” (A/CN.9/WG.III/WP.23).The most historic step to date in modernizing federal securities regulation and applying to crypto assets”。

The significance of this proposal, which the team felt could be summed up by saying that in the past the regulation of the SEC was purely law enforcement, i.e. ex post sanctions, both Coinbase and Money-Anne had been taught, but now that the proposal has come out, it is likely that the SEC will slowly transform the model of ex post sanctions into a rule-based pre-directional model, as my team has followed the evolution of virtual monetary regulation worldwide for a long time. With regard to the possible changes in the regulatory model that this proposal may trigger today, the team will work with its friends to decompose it, analyse its practical impact on virtual currency practitioners at different stages, and, in a comparative legal perspective, to clear the rules of the main jurisdictions, hoping to enlighten them.

I. WHAT IS THE PROPOSAL SAYING?

This proposal is in fact a reflection of an industry dilemma, and since the wave of ICO in 2017, the SEC has not established specific registration rules for the issuance of crypto assets, but has relied on the concept of "investment contract" tested by Howey to determine whether the issue of tokens constitutes a securities issue on a case-by-case basis. This pattern peaked between 2020 and 2024, when the SEC brought proceedings against front-runners such as Ripple, Coinbase and Binance, resulting in a de facto regulatory chilling effect. While the past model allows market participants to rely only on speculation in judging compliance boundaries, the value of the rules is to replace post facto speculation with a fixed threshold, a clear disclosure obligation and a set of self-measurement conditions that issuers can measure before issuance. It is clearly dangerous to judge compliance borders by mere speculation.

The CLARTY Act, which comprehensively regulates the encryption industry, was passed in July 2025 in the Chamber of Deputies, but has been put on hold in the Senate for a long time, comprehensive legislation is deadlocked and the SEC urgently needs to fill the policy vacuum with administrative rules. Second, after the second term of office in 2025, Atkins has explicitly shifted his regulatory strategy to prior direction; Thirdly, in the absence of clear rules, a large number of high-quality projects have been forced to move overseas, with the participation of United States investors facing even smaller protections aimed at returning encrypted capital and innovation to the mainland.

At the heart of the proposal was a tailored distribution system that covered investment contracts, i.e. those that were not crypto assets of their own securities. Initial exemption (proposed rule 200) is a one-time, non-exclusive registration exemption that allows the issuer to issue a total of not more than $5 million over a maximum period of four years and requires public submission of documents to the SEC at the end of the exemption period, as well as provision to investors of principle-based narrative disclosure on project positioning, token functions and main risks. It does not require financial statements, does not have a ceiling on bulk purchases and allows for public publicity consistent with the operational model of the earlier white paper + community distribution of the encryption project. The issuer relying on this exemption remains bound by the anti-fraud, anti-manipulation provisions of the Federal Securities Act.

The financing exemption is partially based on the Regulation A structure, divided into two levels: Tier 1 allows issuance of up to $20 million within a 12-month period; Tier 2 is a ceiling of $75 million. Both tranches are subject to public issuance, including principled narrative disclosure, financial position discussion and financial statements, Tier 2 requires that the financial report be audited and that ongoing reporting obligations be undertaken, and investments by unqualified investors are subject to a ceiling of 10 per cent on income or net assets. The release materials are to be submitted electronically through Form 1-CRYPTO and have been certified by SEC staff.

Conditional safe harbours (proposed rule 400) are the most relevant provisions of the proposal and respond to the central question as to when a token can no longer be considered as the subject of an investment contract. When the issuer completes or permanently terminates all key management and operational efforts to which he has committed an investor, and no new regulatory commitments are made in respect of the underlying crypto asset, and publicly submits authentication documents and analytical bases to the SEC, the SEC will conclude that the covering investment contract has been terminated and that the underlying crypto asset is no longer subject to the investment contract under the securities definition of the Securities Act and the Exchange Act. The safe harbour uses status rather than time standards, has no fixed duration and does not use the quantitative test of a single-subject shareholding of up to 20 per cent in the CLARITY Act, but focuses on whether issuers have substantially withdrawn from key management efforts. In addition, the proposal includes a definition of qualified purchasers and federal law prioritizes registration and qualification requirements for investment contracts and specific secondary market transactions issued under this regulation, significantly reducing the cost of cross-state issuance.

Impact on virtual currency practitioners

For the encryption team at the seed wheel, angel wheel stage.For the first time, the initial exemption provided a clear and predictable avenue for compliance at the federal level. Earlier projects either relied on Reg D's immunity for private purposes only for qualified investors and were not open to publicity, or risked being released to the public in a state of impunity at any time, exposed to law enforcement risks. The initial exemption allowed up to $5 million over four years, with no ceiling on the number of dispersed households, open publicity and only principled narrative disclosure, providing temporary breathing space for early projects. However, practitioners need to be aware that an exemption from registration does not amount to a waiver of liability: investors can still initiate securities fraud proceedings if there are material misrepresentations or omissions in narrative disclosures; The initial exemption is one-time, and if financing is still needed after four years, it must be shifted to financing exemptions or full registration. The team should simultaneously advance the compliance architecture during the exemption period, rather than view it as a permanent safe haven.

Long-term projects with an established user base requiring larger scale financingThe financing exemption provides a stratified path ranging from $20 million to $75 million. Tier 1 is relatively friendly and suitable for completing projects that require market expansion funds; Tier 2 requires a medium issuer that audited financial statements and ongoing reporting obligations mean that the team must have a standardized financial and information disclosure system in place, with a significant increase in compliance costs. It is recommended that teams relying on the tranche exemption be introduced to audit bodies in advance, that financial controls be established and that disclosure obligations be embedded in the design of a currency economy model to avoid disqualification from meeting ongoing reporting requirements after issuance.

The safe harbour clause addresses the most difficult graduation problem throughout the life cycle of crypto assets. Under the Howey test framework, tokens constituted investment contracts at the beginning of their issuance because investors relied on the management efforts of the issuing team, but as networks were decentralised and the founding team withdrew from critical operations, their security attributes should be terminated. However, the SEC had never previously given clear exit criteria and the projector could only confirm its status by applying for a letter of inaction or waiting to be sued. The proposed rule 400, with the termination of key management efforts as its core criterion, would be to depart from the definition of securities at both levels of law once it was met, and would significantly reduce the risk of compliance in secondary market transactions, top office, hosting, etc. However, practitioners need to note that safe harbours require not only that issuers meet existing commitments but also that they refrain from making new regulatory commitments and continue to maintain investors ' reliance on their management efforts by developing road maps and operational commitments; The authentication documents are legally binding and false statements will be held liable for securities fraud; Safe harbours only address issues of security attributes, do not affect the CFTC ' s commodity regulation, nor are they exempt from anti-money laundering, sanctions compliance, etc.

For the exchange.While the currency issued in compliance with this regulation has a clear federal law immunity status and the legal risk of making decisions on the currency is significantly reduced, the regulations do not provide guidance to brokers and trustees on how to handle graduated coins. The regulatory gaps in the intermediary chain remain to be filled. The proposal provides a broad definition of transactions that covers not only capital collection but also network incentives such as air drops, pledge awards, governance token distribution, etc., which the team should include in its compliance assessment when designing a mechanism for the distribution of tokens.

Of course, the team would also like to remind its friends that the proposal is currently at a 60-day public consultation stage and that the final rules may be adjusted. The proposal is an administrative rule, with lower levels of effectiveness than in the legislative branch of Congress, and stability is more affected by the political climate. If a future government changes and appoints the Chairman of the SEC who is opposed to the encryption industry, there is a risk that it will be overturned. The safe harbour uses a self-certification model and lacks an ex ante validation process for the SEC, with issuers still having to take the risk of judgement on their own. In addition, the proposal differs from the CLARITY Bill on issues such as decentrization tests and the division of jurisdiction by the CTC. If legislation is finally passed in Congress, its statutory provisions will prevail over the SEC rules and practitioners will have to follow two legislative paths simultaneously.

III. Inspiredness and compliance recommendations for national friends

The team must first emphasize to your friends a basic premise:The exemption rules of the United States SEC apply only to issuances in or to investors in the United States and cannot change the regulatory attitude in China with respect to virtual currency-related operations.The 2021 Circular on Further Prevention and Handling of the Risks of Firing Virtual Currency Transactions of 10 departments, including the People ' s Bank of China, makes it clear that virtual currency-related operations are illegal financial activities, as is the provision of services to residents in the country via the Internet by virtual currency exchanges abroad. Thus, even if they plan to use the United States exemption for offshore compliance issues, domestic teams may not market, raise funds or provide services to residents in their territory, otherwise they may be guilty of illegal public deposits, fund-raising fraud, unauthorized stock issuances or corporate bonds.

For teams that do have maritime requirements, it is proposed to establish issuing entities outside the country in their main structure, ensuring that distribution decisions, fund-raising and technical operations are completed abroad, establishing a clear separation of personnel, funds and systems with internal teams, and avoiding being identified as re-issued or for internal residents.In the choice of distribution path, early projects can assess the applicability of initial exemptions, prepare in advance documents in principle, with a focus on ensuring that disclosure of project positioning, token functions, use of funds and key risks is true, accurate and complete, and avoid exaggerating publicity or promised returns; Large-scale projects should be pre-empted by audit agencies to assess the organizational costs of Tier 2's continuing reporting obligations. In the planning of safe ports, teams should consider graduation paths at the outset of project design, gradually promote network decentrization, preserve evidence such as governance token allocation, validation of nodes and decentralization of development activities, and accumulate conditions for future certification.

Regardless of which tranche of exemption is chosen, the anti-fraud clause is a non-attractive bottom line, and teams should avoid making firm commitments about the timing of currency listings, price performance and progress in development, and disclosure material should be examined by counsel.In the area of money-laundering, money transfer operations may need to be registered as a monetary service provider (MSB), while EU users are required to meet the requirements of the CASP compliance and travel rules under the MiCA; sanctions compliance requires rigorous screening of IP addresses, wallet addresses, and user identities to prevent targeted countries or individuals from participating in their distribution. For projects planned to operate in multiple jurisdictions, a tiered compliance strategy should be developed based on the distribution of target market users, with an individual designated to keep track of changes in rules across jurisdictions.

At the end.

The team would like to remind you that the newly introduced SEC proposal does not and cannot solve all the legal problems facing the encryption industry – the stability of administrative rules is questionable, relations with Congress legislation are clear, and standards for dealing with intermediaries remain blank – but it provides practitioners for the first time with a set of fixed thresholds and clear conditions that can be measured by themselves before distribution, which in itself is an enormous advance.

Regulatory certainty is more valuable to global virtual currency practitioners than regulatory easing: clear rules, while increasing the cost of compliance, also eliminate law enforcement swords hanging over their heads so that real teams can move forward on a predictable track.

In fact, compliance with the encryption industry has become an irreversible global trend. Whether it be the United States exemption route, EU uniform license plates or Hong Kong, Singapore and Singapore sandbox pilots, the same signal is being sent: regulators no longer view crypto assets as different types that need to be cleared, but rather as financial activities that need to be regulated. For domestic practitioners, it is important to identify the red line and keep the legal bottom line in the country, as well as proactively embrace compliance and advance planning structures in the maritime layout. The clarity of regulatory rules is binding in the short term and entry tickets to mainstream industries in the long run. Teams preparing for the opening window of the rules will be able to move more steadily and further in the next round of industry cycles.