Galaxy Research has said the SEC’s proposed Reg Crypto framework could give hundreds of existing tokens a formal route out of investment contract status.
Summary
- The SEC expects about 475 issuers each year to use the proposed safe harbor.
- Galaxy said the exit process could matter more initially than the two fundraising exemptions.
- Reg Crypto would permit qualifying offerings of up to $5 million or $75 million.
- Public comments on the proposed rules are due by Oct. 20.
Galaxy Research, in an Aug. 21 analysis, said the proposal could replace years of uncertainty over when an investment contract tied to a token ends with a filing and a recorded date.
Alex Thorn, Galaxy’s head of firmwide research, said the first visible effect could be the resolution of securities-law questions surrounding tokens already in circulation, rather than a fresh wave of public token sales.
The SEC estimated that about 475 issuers would file transition reports under the investment contract safe harbor each year. By comparison, the agency expects approximately 130 annual offerings across the proposal’s two new fundraising exemptions.
According to Galaxy, the difference suggests that existing projects may have more immediate use for the exit process than new issuers have for the fundraising routes.
“Reg Crypto could provide meaningful regulatory clarity, but only Congress can make that clarity durable,” Thorn said.
Reg Crypto could give legacy tokens a formal exit
Under the proposal, the safe harbor would apply to a crypto asset that is not itself a security but was issued or sold as part of an investment contract. The framework would not cover tokenized stocks, bonds, or arrangements combining tokens with equity or another security.
An issuer could use the safe harbor after completing or permanently ending all essential managerial work promised to buyers. The issuer must also stop making new promises to perform such work and file a transition report with the SEC.
Once the requirements are met, the related investment contract would be treated as terminated under the Securities Act and the Securities Exchange Act. The token could continue to exist and trade without remaining tied to the original contract.
Galaxy described the framework as a workable legal model for a token’s lifecycle because the investment contract could begin when the asset is issued and end after the issuer’s promised work is finished. Unlike corporate stock, the token would not carry permanent securities treatment solely because it was once distributed through an investment contract.
Issuers would drive the process by filing Form TR and certifying that they met the conditions. An earlier comparison of the frameworks noted that the SEC would retain the power to challenge a certification.
Projects would not need to have used either the Reg Crypto fundraising exemption to seek the safe harbor. Galaxy said the standalone route is therefore relevant to tokens issued years before the proposal, including assets whose legal position has remained unsettled through regulatory speeches, enforcement settlements and court cases.
The SEC estimates that preparing a standalone transition report would require an average of 30 burden hours, including work performed by outside professional service providers. Galaxy said the expected workload means most issuers would probably need legal or compliance support to complete the process.
Two exemptions would open token sales to US investors
Alongside the safe harbor, Reg Crypto proposes two exemptions from the registration requirements of the Securities Act of 1933.
As crypto.news previously reported in its coverage of the $75 million exemption, the startup route would allow an issuer to distribute up to $5 million in covered investment contracts during a maximum four-year period. The one-time exemption would require public filings at the beginning and end of the period.
A second route, modeled on Regulation A, would contain two tiers. Tier 1 would permit an issuer to raise up to $20 million in 12 months, while Tier 2 would raise the ceiling to $75 million during the same period.
Offerings under the second route would require SEC qualification, financial statements, and continuing reports. Tier 2 issuers would also need audited financial statements and substantial organizational, management, and asset ties to the United States.
For unaccredited investors, the purchase limit would equal 10% of annual income or net worth, whichever figure is higher. Galaxy said the provision would give US retail buyers lawful access to qualifying token distributions while imposing a defined exposure limit.
Covered investment contracts sold through either exemption would not be restricted securities under the proposal. Unless the issuer added a separate contractual restriction, buyers could resell them immediately without a federal holding period.
Galaxy identified the lack of a resale lockup as a potentially important feature for projects that want tokens to circulate among users instead of remaining with venture investors. The research firm also noted that issuers would accept detailed disclosure and reporting duties in return for that flexibility.
Token disclosures would differ from stock filings
Rather than relying only on disclosure rules written for corporate shares, Reg Crypto would require information tied to how digital assets operate.
Issuers would need to disclose token supply, release schedules, minting and burning systems, governance arrangements, and smart contract permissions. Required information would also include source code, the structure of the project’s ecosystem, development promises, and progress toward completing them.
Galaxy said the list addresses information that token buyers use when assessing a project but that may not appear in a conventional equity filing. Token ownership does not necessarily give buyers the voting, dividend or liquidation rights attached to corporate stock, making supply controls and smart contract access more relevant to the investment decision.
Even with the new pathways, Thorn questioned how many projects would choose the fundraising exemptions. Rule 506 under Regulation D already permits uncapped offerings without an SEC qualification process or continuing public reports, although it does not offer the same public distribution route to non-accredited buyers.
Offshore structures could present another obstacle for larger offerings. According to Galaxy, token projects often use overseas foundations for governance, treasury management and tax planning, while the larger Reg Crypto exemption would require much of the issuer’s organization, management and assets to sit in the United States.
The startup exemption does not impose the same US incorporation condition. Galaxy said smaller domestic offerings could therefore use the $5 million route more readily, despite its lower ceiling.
SEC rules would leave part of the market unresolved
Reg Crypto would preempt state registration and qualification requirements for covered primary offerings and certain secondary transactions, provided that the issuer remained current with its obligations. The state antifraud authority would continue to apply.
The proposal does not establish rules for exchanges, brokers, dealers, or custodians. It also does not determine whether a token that leaves investment contract status becomes a commodity under the Commodity Futures Trading Commission’s supervision.
A separate analysis of Reg Crypto found that the safe harbor could therefore remove SEC treatment without assigning the token to another federal regulator. The CLARITY Act would address that question through legislation dividing oversight between the SEC and CFTC.
Galaxy warned that an agency rule could also be changed by a future commission. Federal legislation would carry more permanence and would override any conflicting SEC rule if Congress enacted it.
The Senate has scheduled a Sept. 15 procedural test for the CLARITY Act, according to recent Senate vote coverage. The cloture motion needs 60 votes and would only allow the chamber to begin considering the bill, not approve its final passage.
The SEC published Reg Crypto in the Federal Register on Aug. 21 under docket S7-2026-27. Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda issued statements supporting the proposal, while the public comment period remains open until Oct. 20.
