The North American Securities Administrators Association (NASAA) is urging the Securities and Exchange Commission (SEC) to withdraw its proposed crypto exemptions, citing concerns that the rules would strip away key protections for retail investors and potentially enable fraud. The bottom line: the proposed exemptions could allow crypto issuers to raise up to $5 million without federal registration, and $75 million every 12 months, with limited disclosure requirements. By the numbers, this means that investors will note a significant lack of transparency and oversight in the crypto market if these exemptions are approved.
Regulatory Concerns
NASAA’s comment letter to the SEC argues that the proposed framework lacks retail-investor safeguards and exceeds the SEC’s authority to preempt state registration and qualification requirements. The association predicts that the rule’s combination of exemptive features could foster pump-and-dump schemes, or “rug pulls,” and that the proposal would remove key disclosure, filing, and resale protections. According to NASAA, the proposed rules would provide federal registration exemptions for covered investment contract offerings, create a safe harbor through which the SEC could deem issuers no longer subject to federal securities laws, and preempt state registration and qualification requirements.
Startup Exemption
Proposed Rule 200 would let crypto issuers raise up to $5 million over four years without federal registration, according to NASAA. The association recommends replacing the proposed principles-based disclosure regime with existing prescriptive disclosure requirements, and requiring financial disclosures and EDGAR filings for startup-exemption issuers. NASAA also objects to the rule’s permitting immediate resale by insiders and other pre-offering holders, and recommends mandatory resale restrictions for related persons and anyone who obtained the securities before the offering. The figure that matters here is $5 million, which is the amount that crypto issuers could raise without federal registration under the proposed rule.
Safe Harbor Provisions
Proposed Rule 400 would permit the SEC to deem an issuer no longer subject to federal securities laws if it claimed to have stopped providing essential managerial efforts, including by fulfilling or failing to fulfill its promises. NASAA challenges the proposal’s treatment of blockchain maintenance or system support as non-essential, arguing that economic realities control under SEC v. W.J. Howey. The association recommends requiring Form TR to describe any continuing involvement by the issuer, its personnel, or affiliates in operating the project and explain how the underlying blockchain would be maintained. Investors will note that this provision could allow issuers to evade federal laws and regulations, potentially putting retail investors at risk.
State Preemption
NASAA’s preemption challenge focuses on proposed Rule 500, which would preempt state registration and qualification requirements for offerings and secondary transactions that comply with either exemption. The association argues that defining every purchaser, including retail investors, as a “qualified purchaser” exceeds the SEC’s authority under Securities Act Section 18(b)(3) and the National Securities Markets Improvement Act of 1996. According to NASAA President Elizabeth Bowling, the proposal would “strip away disclosure requirements, filing requirements and resale restrictions without due regard to the adverse impact on retail investors.” The proposal has also drawn criticism from consumer protection advocates, such as Better Markets, and politicians, including New York State Attorney General Letitia James and Massachusetts Secretary of the Commonwealth William Galvin.
Disqualification and Reporting Standards
NASAA further urged the SEC to align the disqualification provision in proposed Rule 104 with Securities Act Rule 262, rather than excluding specified disqualifying events that predate an eventual effective date. The association noted that Rule 262 permits good-cause waivers, which would provide a more robust framework than the current proposal. Additionally, NASAA objected to Rule 200’s reporting timeline, which would only require an amendment within 30 calendar days after year-end if material changes existed. According to the association, this could allow material events to remain unreported for as long as 13 months.
To improve transparency, NASAA recommended that the SEC require current reporting similar to the standards outlined in proposed Rule 305(a)(4). The association also suggested that the SEC limit the startup exemption to U.S. businesses, explicitly excluding natural-person issuers. Furthermore, NASAA advised the SEC to apply a concentration limit to the startup exemption comparable to the limit for non-accredited investors found in Rule 300, ensuring that the regulatory framework does not facilitate the victimization of retail investors.
Sources
- NASAA NEWS AND SPEECHES—NASAA urges SEC to withdraw proposed crypto exemptions
- NASAA Urges SEC to Scrap Crypto Rule Plan
Photo: David Jones / Unsplash (Unsplash License)
