ICO Hype May Be Hard to Recreate; SEC Proposes Two Exemptions in Crypto Asset Regulation Rules

Odaily News, SEC published the proposed rules for "Regulation Crypto Assets" on August 18, which set two exemptions for specific investment contracts involving crypto assets: allowing startups to raise up to $5 million in a single offering within 4 years, and allowing eligible issuers to raise up to $75 million within any 12-month period, potentially conducting different rounds of offerings in subsequent years. Drew Hinkes, a partner at Winston & Strawn, stated that as long as each round of financing constitutes a separate and independent offering, projects could theoretically raise $75 million every 12 months. Lilya Tessler, head of Sidley's Fintech and Blockchain practice, noted that subsequent offerings are not automatically approved; issuers must resubmit offering statements, undergo SEC staff review, continue to file annual and semi-annual reports, and disclose funds raised through the exemption over the past 12 months to confirm that the fundraising cap has not been exceeded. The proposed rules also limit the participation size of non-accredited investors, whose purchase amount cannot exceed 10% of the higher of their annual income or net worth. Lee Reiners, a financial regulation expert at Duke University, stated that the limited initial offering amount may make early token allocations more attractive, but the rules are unlikely to recreate the ICO boom of 2017. Up to 90% of projects that raised funds through ICOs between 2017 and 2019 ultimately failed. The SEC estimates that approximately 130 offerings per year will use the two exemptions, and about 475 issuers may use the broader investment contract safe harbor. The proposed rules will provide token issuers with a clearer path for U.S. fundraising compared to the current framework, but secondary market trading may still involve a gray area regarding securities attributes. The proposal stipulates that investment contracts related to crypto assets may continue to transfer with the tokens in secondary market transactions until the asset is separated from the issuer's representations or commitments. Drew Hinkes stated that if a non-security token is transferred along with an investment contract from seller to buyer, the transaction could still be deemed a securities transaction, potentially affecting trading platforms. Lee Reiners also noted that some issuers might satisfy the formal requirements of the exemptions while still influencing token value through team management efforts, concentrated insider holdings, and aggressive promotion.