Galaxy Research: Can SEC’s New Reg Crypto Rule Open a New Era for Token Fundraising?

On Aug. 18, the U.S. Securities and Exchange Commission proposed Reg Crypto, a rule set built specifically for crypto asset offerings and sales rather than a simple extension of stock rules to tokens. Galaxy Research, in a report by research head Alex Thorn, says the proposal could give U.S. token issuers a third path. It would allow some tokens to be sold legally to the public, including non-accredited investors, without a registered offering. It would also create a formal, time-based process for ending token-related investment contracts. For the past decade, U.S. issuers have largely had two options: pursue a registered offering, which very few projects can complete in practice, or launch offshore. Reg Crypto would add a third route and, at the same time, offer a possible exit path for thousands of tokens already trading without clear legal status. The rule would apply only to crypto assets that are not securities themselves, but whose offer or sale is part of an investment contract tied to promises to build a product, network or ecosystem. Tokenized stocks and bonds, as well as structures that link tokens to equity or other securities, are excluded. The framework has four stages: raise, disclose, build and exit. Under the raise stage, a one-time startup exemption would let an issuer raise up to $5 million over as long as four years, with public filings required at the start and end of that period. A larger exemption, modeled on Regulation A, would allow up to $20 million or $75 million over 12 months depending on the tier. Issuers seeking either exemption would need SEC qualification and ongoing reporting, including financial statements. The higher tier would also require audited financials, and the issuer would need to maintain a substantial U.S. nexus in structure, management and assets. The disclosure stage would require token-specific information, including supply and release schedules, minting and burning mechanics, governance, smart contract permissions, source code, and the most important point of all: what the issuer promised to build and how far it has gotten. The build stage gives startup issuers up to four years to complete the core work they committed to do. Once an issuer finishes or permanently stops that work, makes no new related commitments, and files a transition report, the related investment contract would be treated as terminated. From that point on, the SEC would no longer treat the crypto asset as subject to that investment contract under the Securities Act or the Exchange Act. That safe harbor would also be available to issuers that never used the fundraising exemptions. In practice, that means the proposal is not just about future token sales; it could also create a possible exit route for tokens issued years ago. The SEC’s own estimates suggest the near-term impact may be more about cleaning up legacy assets than sparking a new issuance wave. The agency assumed about 475 issuers a year would use the investment-contract safe harbor, while roughly 130 projects a year would use the two new fundraising exemptions. Tokens sold under either exemption would not be treated as restricted securities. Unless a contract says otherwise, they could be resold immediately. The proposal would also preempt some state registration and qualification requirements for eligible first sales and certain secondary trades, as long as issuers keep meeting the obligations. It does not address exchanges, brokers, dealers or custody businesses, and it is separate from another innovation exemption the SEC has discussed for tokenized securities and onchain trading. The comment period will last 60 days after the proposal is published in the Federal Register. The SEC canceled a planned open meeting on Aug. 14 and released the proposal four days later. Three sitting commissioners — Chair Paul Atkins, and commissioners Hester Peirce and Mark Uyeda — each issued statements in support. Even so, the timeline remains tight if the rule is to be finalized before 2027. Galaxy Research says Reg Crypto is a constructive step and one of the clearest signs yet that the SEC is not waiting for Congress to modernize its own framework. The disclosure regime reflects the SEC’s growing recognition that token offerings are different from stock offerings. It requires issuers to disclose token supply and release schedules, minting and burning mechanics, smart contract permissions, source code links, ecosystem structure, and an ongoing record of what the issuer promised to build and what progress has been made. Those are the details token buyers actually care about, and they are not the same details equity investors want. In Galaxy Research’s view, the SEC is acknowledging a difference it refused to recognize under former Chair Gary Gensler: token issuance and equity issuance differ in form and function, so the disclosure investors need should differ as well. The rule also takes time seriously. A stock issuance leaves securities status in place for the long run. Under Reg Crypto, the related investment contract can begin at issuance, bind the issuer during the build period, and then end on a publicly recorded date, even if the token itself still exists and continues to trade. That makes Reg Crypto more than a new exemption. It is a lifecycle-based framework turned into enforceable rules. Whether issuers will actually use the fundraising exemptions is still an open question. Rule 506 under Regulation D remains available, with no fundraising cap, no SEC qualification requirement and no ongoing public reporting. Reg Crypto’s edge is different: it allows lawful public offerings to non-accredited investors, immediate transferability of the securities sold under the rule, and preemption of some state-level registration requirements. For projects that want tokens to circulate rather than sit in venture capital portfolios, the absence of a federal holding period may be the most underappreciated part of the proposal. The trade-off is real disclosure and reporting. For the larger exemption, it also means maintaining a substantial U.S. presence. That creates another hurdle. Many token projects have set up offshore foundations not only to avoid U.S. securities law, but also for governance, treasury management and tax reasons. The larger exemption in Reg Crypto would require many projects to move the issuer, management, operations and most assets back to the U.S. in a meaningful way. Until U.S. tax treatment of token sale proceeds and treasury distributions becomes clearer, that requirement may be enough to keep many projects in their current structure. The startup exemption does not have the same U.S. nexus requirement. Even with a $5 million cap, that may make it more usable in the earliest stages. If those issues can be worked out, Galaxy Research says the most interesting outcome would be a truly legal version of token fundraising 2.0. One of crypto’s earliest major use cases was capital formation: projects raising money directly from future users rather than relying entirely on venture capital and traditional private fundraising. The 2017 token boom showed both the demand for the model and the consequences of using it without credible disclosure, investor protections or enforceable rules. Reg Crypto fills in many of the missing pieces: exemptions for different fundraising sizes, disclosures tailored to tokens, access for public investors within set limits, and a clear point at which the issuer’s securities-law obligations end. It could also create a new service layer. Securities lawyers, auditors, technical disclosure firms, launch platforms and compliance providers may all benefit from helping projects prepare offering materials and transition reports, much as Regulation A+ spawned its own ecosystem. The first projects likely to use the framework are those with U.S. entities, clearer organizational structures and the ability to absorb ongoing disclosure costs. The SEC estimates that preparing a transition report under the standalone safe harbor would take about 30 hours on average, including outside professional costs. Even the exit process will rarely be simple enough for a project to do entirely on its own. In the short term, exit may matter more than fundraising. The clearest immediate effect of Reg Crypto may be the cleanup of legacy tokens, not a revival of U.S. token issuance. For years, the market has tried to infer from SEC speeches, settlement agreements and lawsuits when an investment contract actually ends. There had been hope that a “sufficiently decentralized” standard would solve that question: once a network no longer had a single controlling party and token value no longer depended mainly on the issuer’s efforts, it might fall outside securities regulation. But that standard was never clearly defined and remained a major source of uncertainty in U.S. crypto regulation. Reg Crypto replaces that fuzziness with formal filings and clear dates. But the proposal is still just that — a proposal, not a final rule. Even if adopted, the framework could still change. It must first go through a 60-day public comment process. Atkins said in his statement that legislation is still essential, and only Congress can prevent future regulators from undoing the framework the SEC is trying to build now. Given how likely the system is to be revised later, that view is hard to dispute. State regulators may also challenge the proposal’s broad federal preemption language. Reg Crypto could bring meaningful clarity to the crypto industry, but only Congress can make that clarity durable.