SEC proposes to define when a crypto investment contract has ceased to exist

The Securities and Exchange Commission published a proposed rule on 21 August 2026 creating “a tailored offering regime for certain investment contracts involving crypto assets,” to be set out in a new “Regulation Crypto Assets.”¹ The Commission states that “[d]espite this growth, the Commission has not to date adapted its rules to address the unique aspects of the crypto asset markets,” and has “generally … looked to the test developed by the Supreme Court of the United States in SEC v. W.J. Howey Co.” to decide whether a crypto asset falls within the federal securities laws.¹² The proposal would add two exemptions from the registration requirements of section 5 of the Securities Act and one safe harbor from the statutory term “investment contract.”¹ Comments are due by 20 October 2026.¹

1. The safe harbor is the part that reaches the statute. Subpart D, Rule 400 “would set forth a non-exclusive safe harbor from the term ‘investment contract’ in the definitions of ‘security’ in section 2(a)(1) of the Securities Act and section 3(a)(10) of the Exchange Act.”¹³⁴ Its operation is a deeming provision: “if the conditions of the safe harbor are satisfied, then a covered investment contract will be deemed by the Commission to have ceased to exist, and the crypto asset that was subject to the covered investment contract will be deemed by the Commission not to be subject to such investment contract for purposes of those statutory definitions of ‘security.’”¹ The Commission frames the question the safe harbor answers as one of managerial effort: it is “intended to provide market participants with greater clarity as to when a covered investment contract has ceased to exist because of a lack of essential managerial efforts and, therefore, the crypto asset is no longer a ‘subject crypto asset.’”¹

2. Size separates the two exemptions, and so does what each demands in return. The first “would permit offerings of up to $5 million during a four-year period.”¹ The second, which the release calls the fundraising exemption, “would permit offerings of up to $75 million during each 12-month period.”¹ Under both, “issuers would be required to make certain principles-based narrative disclosures available to their investors”; under the second alone, issuers “would be required to provide financial statements and would be subject to ongoing reporting requirements.”¹

3. What the proposal does not displace is the antifraud regime. Issuers relying on either exemption “would remain subject to the antifraud and antimanipulation provisions of the Federal securities laws.”¹ The exemptions run to the registration requirements of section 5 rather than to liability, and the safe harbor is expressly “non-exclusive,” so an asset outside it is not thereby a security and an asset inside it is not thereby beyond every other provision.¹

4. The Commission claims power to exempt, not to define. The Commission proposes the rules “under the authority set forth in the Securities Act, particularly sections 3(b), 18, 19(a), and 28 thereof, and the Exchange Act, particularly sections 3(b), 12, 13, 15, 23(a), and 36 thereof.”¹ Section 28 of the Securities Act is the Commission’s general exemptive authority: it “may conditionally or unconditionally exempt any person, security, or transaction … from any provision or provisions of this subchapter,” to the extent the exemption “is necessary or appropriate in the public interest, and is consistent with the protection of investors.”⁵ The Commission does not claim authority to amend the statutory definition of “security,” which is what makes the deeming language in Rule 400 the provision to watch as comments come in.¹