SEC's crypto fundraising rules face consumer group pushback

• Key insight: Critics of the proposed SEC rules warned that they could weaken investor protections and eliminate state oversight.
• What's at stake: As the SEC moves to establish a regulatory framework for crypto, industry insiders warn that the rules may lack the permanence of legislation passed by Congress.

The Securities and Exchange Commission's proposed rules to ease fundraising steps for crypto firms faced pushback from investor and consumer protection groups and state regulators.

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Commentators on the proposed rules, dubbed "Regulation Crypto Assets," including The California Department of Financial Protection and Innovation, Better Markets and Americans for Financial Reform Education Fund, raised concerns about insufficient investor protections. They also questioned the SEC's authority to issue the rules and the durability of the proposed framework. Comments on the proposal were due Oct. 20. 

The SEC's proposed rules include two exemptions that would allow certain crypto companies to raise capital without going through the traditional securities registration process. The SEC proposed the rules in September, partly in response to stalled congressional efforts to advance crypto market structure legislation. 

In a letter to the SEC, Americans for Financial Reform Education Fund, a consumer protection nonprofit, said it "has grave concerns" about the proposal's potential effects on financial stability. The group argued that the rules would provide weaker investor protections and disclosure requirements than those available in public equity markets, leaving investors vulnerable to "the fraud and predatory practices that are endemic in crypto markets." 

The proposed SEC's exemptions would allow companies to conduct a one-time offering of up to $5 million over four years or raise up to $75 million in a 12-month period, subject to ongoing reporting requirements for the latter exemption.

The proposal also includes a conditional safe harbor that could allow certain crypto assets to eventually fall outside the definition of a security if they meet specific requirements.

It would also limit states' ability to impose separate securities registration requirements on certain crypto offerings that qualify for the federal exemptions.

Better Markets, a financial advocacy group, urged the SEC to withdraw the proposed rules, arguing that they "fly in the face of" the Securities Act of 1933, which was designed to protect the public by requiring "full and fair disclosure" in the initial sale of securities.

In its letter, Better Markets argued that crypto offerings should not be exempt from securities registration requirements because investors need the same protections as those in traditional securities offerings. To support its argument, the group cited a 2025 FBI internet crime report, which found that cryptocurrency-related complaints accounted for the highest reported losses, totaling more than $11 billion across 181,565 complaints. 

Meanwhile, The California Department of Financial Protection and Innovation said the proposed framework undermines its authority to review high-risk securities offerings before they hit the market.

"Preempting the state's securities law registration and qualification requirements as set forth in the proposal would harm investors by depriving them of critical protections against potentially unfair, abusive, and fraudulent securities offerings," DFPI said in its letter.

The CFA Institute, while supportive of regulatory clarity for crypto markets, warned that the SEC could face legal challenges if courts determine the agency exceeded its statutory authority in proposing the rules.

The institute pointed to the Supreme Court's 2024 decision in Loper Bright Enterprises v. Raimondo, which ended judicial deference to federal agencies' reasonable interpretations of ambiguous laws and directed courts to exercise independent judgment when determining the scope of agencies' authority.

"We worry that attempting to do so invites challenges under Loper Bright and increases the risk that a court will conclude that the Commission has exceeded its statutory authority," the institute wrote.

Crypto companies broadly supported the proposal and urged the SEC to ease reporting requirements and raise fundraising limits. Coinbase in its letter urged the SEC to raise the startup exemption's cap from $5 million to $20 million over four years and eliminate the $75 million Tier 2 cap for issuers that provide audited financial statements. 

"Without higher offering limits, large projects looking to raise capital in excess of the limits would be forced to register their contractual investment contracts on an ill-suited Form S-1 or, as they have done in the past, raise capital privately and/or offshore," Coinbase said.

With the CLARITY Act stalled in Congress, the SEC and the Commodity Futures Trading Commission have pursued their own regulatory efforts to clarify their respective responsibilities and create clearer registration pathways for crypto exchanges and custodians. 

Separately, the SEC issued an order allowing certain tokenized U.S. stocks to be traded on blockchain-based platforms under a temporary, limited regulatory framework.  

The CFTC, meanwhile, moved in October to gather public input on a potential federal regulatory framework for leveraged crypto trading, following through on a plan previously outlined by the agency's chair.

But despite efforts by both the SEC and CFTC to establish a regulatory framework for crypto markets, industry insiders warn that agency rules lack the permanence of legislation passed by Congress and could be more easily reversed by future administrations.