Key Takeaways
- • The "Shadow SEC" group of law professors (John Coates, John C. Coffee, Jr., James D. Cox, Merritt B. Fox, and Joel Seligman) urged the SEC to repropose or withdraw Regulation Crypto Assets, arguing the proposal overreaches in carving crypto assets out of registration and disclosure rules.
- • Better Markets called for the SEC to withdraw the proposal, contending the agency has not justified exceptions for crypto and that the proposal fails to address the prevalence of fraud in crypto offerings.
- • Both comment letters argue that registration remains the default under the Securities Act and that the current exemption framework and Regulation S-K already provide sufficient flexibility to address crypto disclosure needs.
- • Better Markets objects to the proposed startup exemption, fundraising exemption, and safe harbor for cessation of managerial efforts, arguing they weaken investor protection and comparability of disclosures.
- • Both groups challenge the proposal's basis for preempting state law and the SEC's authority to create a tailored offering regime beyond its exemptive powers.
Summary
Two comment letters, as reported by Securities Regulation Daily (VitalLaw), urge the SEC to repropose or withdraw Regulation Crypto Assets, the proposed framework for non-security crypto assets subject to an investment contract. Both letters criticize the proposal's failure to address the risk of fraud in crypto offerings and its singling out of crypto assets from the general regime requiring registration unless an exemption applies.
The "Shadow SEC," a group of law professors comprising John Coates, John C. Coffee, Jr., James D. Cox, Merritt B. Fox, and Joel Seligman, says the proposal does some things right but suffers from two fundamental overreaches. The professors argue the SEC has not made the case for treating an investment contract differently because it is based on a digital asset. They also contend the proposal overstates the case for principles-based disclosure and mischaracterizes the existing disclosure framework as "inflexible," noting that management has broad discretion under Regulation S-K, including the Management Discussion and Analysis. The group argues the current Securities Act exemptions are working, calling into question whether Regulation Crypto Assets is needed at all. Its letter states that the release gives weight to industry commenters seeking reduced disclosure without considering the effect on fraud risk. The professors acknowledge the proposal's enumeration of information relevant to crypto investors but note such information, when material, is already required or could be addressed under Regulation S-K. They conclude that the regulation should at least be reproposed.
Better Markets said the SEC should withdraw the proposal outright. It emphasizes that registration is the default under the Securities Act and that nothing about crypto offerings suggests less need for investor protection. Better Markets disputes the SEC's assertion that the Howey test is difficult to apply to crypto assets, stating courts have applied Howey without difficulty and have generally found crypto assets to be securities. The group argues that the proposal arbitrarily singles out investment contracts involving a blockchain, noting that biotechs, manufacturers, and private funds all seek easier capital-raising. Better Markets says the startup exemption is inconsistent with investor protection and that the fundraising exemption, while requiring some financial information and audited statements, still permits principles-based disclosure that hampers comparability. The safe harbor for cessation of managerial efforts, it argues, lets issuers determine when federal securities laws no longer apply, reducing disclosure when investors most need it. Both groups further contend the proposal lacks a valid basis for preempting state law and that the SEC exceeds its exemptive authority.
The "Shadow SEC," a group of law professors comprising John Coates, John C. Coffee, Jr., James D. Cox, Merritt B. Fox, and Joel Seligman, says the proposal does some things right but suffers from two fundamental overreaches. The professors argue the SEC has not made the case for treating an investment contract differently because it is based on a digital asset. They also contend the proposal overstates the case for principles-based disclosure and mischaracterizes the existing disclosure framework as "inflexible," noting that management has broad discretion under Regulation S-K, including the Management Discussion and Analysis. The group argues the current Securities Act exemptions are working, calling into question whether Regulation Crypto Assets is needed at all. Its letter states that the release gives weight to industry commenters seeking reduced disclosure without considering the effect on fraud risk. The professors acknowledge the proposal's enumeration of information relevant to crypto investors but note such information, when material, is already required or could be addressed under Regulation S-K. They conclude that the regulation should at least be reproposed.
Better Markets said the SEC should withdraw the proposal outright. It emphasizes that registration is the default under the Securities Act and that nothing about crypto offerings suggests less need for investor protection. Better Markets disputes the SEC's assertion that the Howey test is difficult to apply to crypto assets, stating courts have applied Howey without difficulty and have generally found crypto assets to be securities. The group argues that the proposal arbitrarily singles out investment contracts involving a blockchain, noting that biotechs, manufacturers, and private funds all seek easier capital-raising. Better Markets says the startup exemption is inconsistent with investor protection and that the fundraising exemption, while requiring some financial information and audited statements, still permits principles-based disclosure that hampers comparability. The safe harbor for cessation of managerial efforts, it argues, lets issuers determine when federal securities laws no longer apply, reducing disclosure when investors most need it. Both groups further contend the proposal lacks a valid basis for preempting state law and that the SEC exceeds its exemptive authority.
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