Key Takeaways
- • California's Department of Financial Protection and Innovation (DFPI) opposed the SEC's proposed Regulation Crypto Assets in a comment letter submitted to the agency, with the warning issued on Oct. 21.
- • The proposal would allow a crypto fundraising exemption of up to $75 million per 12-month period, and a startup exemption of up to $5 million over four years.
- • DFPI Commissioner KC Mohseni argued the federal framework would override state authority and remove preventive investment screening tools.
- • DFPI reported nearly 200 new crypto-related scams added to its tracker, a 30% year-over-year increase.
Summary
California's financial regulator has formally opposed a U.S. Securities and Exchange Commission proposal on crypto asset offerings, arguing that the federal plan would weaken investor protections by limiting states' ability to review offerings before they are sold. The Department of Financial Protection and Innovation (DFPI) outlined its objections in a comment letter to the SEC, which it issued on Oct. 21. DFPI Commissioner KC Mohseni said California "will not accept" a coordinated effort by federal regulators to override state authority while stepping back from oversight.
The proposed Regulation Crypto Assets framework sets out two fundraising routes. A startup exemption would allow qualifying issuers to raise up to $5 million over four years, while a separate crypto fundraising exemption would permit up to $75 million per 12-month period. Both routes would require narrative disclosures explaining the project, its risks, and other information investors need to evaluate an offering. The fundraising route would also require financial statements and ongoing reporting. Federal antifraud provisions would continue to apply, and states would retain authority to investigate fraud, deceit, and unlawful broker or dealer conduct.
DFPI's central objection concerns the loss of preventive screening, namely state registration and qualification requirements that would be constrained by federal limits. SEC Chairman Paul Atkins has presented the tailored exemptions as a means of bringing issuers and capital formation onshore. The proposal also includes a conditional safe harbor that would allow a crypto asset to cease being treated as an investment contract once specified conditions are met, including completing or permanently ending essential managerial efforts on which investors rely for expected profits.
Industry participants have offered mixed input. Ripple requested trading safeguards, Coinbase (Nasdaq: COIN) sought clearer rules for subsequent token sales, and Nasdaq (Nasdaq: NDAQ) emphasized preserving investor protections for traditional securities, including tokenized stocks and funds. State officials cited continuing exposure to crypto investment fraud, noting DFPI added nearly 200 crypto-related scams to its tracker, a 30% increase from the prior year. Officials also warned the approach could extend beyond digital assets to other investment products, and California plans to examine other longstanding laws that could address market manipulation and deceit.
The proposed Regulation Crypto Assets framework sets out two fundraising routes. A startup exemption would allow qualifying issuers to raise up to $5 million over four years, while a separate crypto fundraising exemption would permit up to $75 million per 12-month period. Both routes would require narrative disclosures explaining the project, its risks, and other information investors need to evaluate an offering. The fundraising route would also require financial statements and ongoing reporting. Federal antifraud provisions would continue to apply, and states would retain authority to investigate fraud, deceit, and unlawful broker or dealer conduct.
DFPI's central objection concerns the loss of preventive screening, namely state registration and qualification requirements that would be constrained by federal limits. SEC Chairman Paul Atkins has presented the tailored exemptions as a means of bringing issuers and capital formation onshore. The proposal also includes a conditional safe harbor that would allow a crypto asset to cease being treated as an investment contract once specified conditions are met, including completing or permanently ending essential managerial efforts on which investors rely for expected profits.
Industry participants have offered mixed input. Ripple requested trading safeguards, Coinbase (Nasdaq: COIN) sought clearer rules for subsequent token sales, and Nasdaq (Nasdaq: NDAQ) emphasized preserving investor protections for traditional securities, including tokenized stocks and funds. State officials cited continuing exposure to crypto investment fraud, noting DFPI added nearly 200 crypto-related scams to its tracker, a 30% increase from the prior year. Officials also warned the approach could extend beyond digital assets to other investment products, and California plans to examine other longstanding laws that could address market manipulation and deceit.
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