After The Clarity Act Fails To Advance, Crypto Securities Law Regulation Is Left To The SEC

On August 18, 2026, the Securities and Exchange Commission (SEC or Commission) released its first regulation proposal addressing crypto assets, appropriately titled Regulation Crypto Assets (Release Nos. 33-11434; 34-106150). The proposed rule does not purport to classify common forms of crypto currency or crypto tokens as securities. Earlier, in a release issued in March 2026, the Commission explained that these forms of crypto assets generally do not satisfy the definition of a security under the Securities Act of 1933, as amended. Instead, the new rule regulates investments in crypto networks or crypto applications that entitle investors to receive crypto assets. These arrangements, assuming specified conditions are satisfied, fall under the Securities Act definition of securities as an “investment contract.” The proposed rule creates two levels of safe harbors under which these investment contracts may be issued as unrestricted securities without compliance with the registration provisions of the Securities Act. Unlike other forms of securities, which are perpetual in nature, these arrangements may cease to be securities after a period of time, when the crypto network or application in which the holders invested becomes self-operational. The treatment of crypto assets under Regulation Crypto Assets is essentially the same for securities law purposes as under the proposed Digital Asset Market Clarity Act of 2025 (H.R. 3633), also called the Clarity Act. The proposed statute was passed by the House but was blocked in the Senate in September, and its future is uncertain.¹ With the Clarity Act’s failing to advance, at least for the time being, crypto securities law regulation is being left to the SEC.²

On March 17, 2026, the Commission issued a release titled “Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets” (Release Nos. 33-11412; 34-105020). For purposes of the release, a crypto asset is defined as “any digital representation of value that is recorded on a cryptographically secured distributed ledger.” A crypto network is defined as “a blockchain or similar distributed ledger technology network,” and a crypto application is defined as “a software application running on a crypto network.”

Because crypto assets are not one of the types of securities specifically listed in the Securities Act definition of a “security,” the analysis of whether a crypto asset or related transaction is a security turns on whether it constitutes an investment contract. An investment contract is typically identified by reference to the so-called Howey test articulated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Under this test, an investment contract is characterized by (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit derived from the efforts of others. 

In the release, the Commission addressed certain types of crypto assets and contracts involving crypto assets:

• Digital commodities. The release describes a digital commodity as a crypto asset that “derives its value from the programmatic operation of a crypto system that is ‘functional,’ as well as supply and demand.” According to the Commission, a digital commodity does not have attributes of a security. Because a digital commodity is the product of a system that “does not have a central party that oversees participation or distributes rewards to users,” the purchaser of a digital commodity would not “reasonably expect to profit based on the essential managerial efforts of others.”³
• Digital collectibles. These are described as crypto assets “designed to be collected and/or used and may represent or convey rights to artwork, music, videos, trading cards, in-game items, or digital representations or references” to other things. Digital collectibles similarly fail the Howey test, as their value is not “based on the expectation of profits from any essential managerial efforts of its creator following creation but rather on supply and demand.”⁴ 
• Digital tools. The release describes a digital tool as a crypto asset “that performs a practical function, such as a membership, ticket, credential, title instrument, or identity badge.” Digital tools fail the Howey test since they “do not have any rights or interest in or with respect to a business enterprise or other entity, promisor, or obligor.”⁵
• Stablecoins. According to the release, “[a] stablecoin is a crypto asset that is designed to maintain a stable value relative to a reference asset like the U.S. dollar.”⁶ Many stablecoins will be excluded from the definition of “security” under the GENIUS Act, passed by Congress in 2025 but not yet in effect. In the release, the Commission adopted the reasoning of its staff from a statement published in April 2024, according to which stablecoins are not securities. The staff performed an analysis both under Reves v. Ernst & Young, 494 U.S. 56 (1990), observing that stablecoins do not have the characteristics of debt-like securities, and under Howey, concluding that buyers were motivated to use stablecoins as digital dollars and not with the expectation of profits derived from entrepreneurial efforts (U.S. Securities and Exchange Commission, Division of Corporation Finance, Staff Statement on Stablecoins (Apr. 4, 2025)).
• Digital securities (or tokenized securities). This category of crypto assets, although maintained in a crypto network, has the features of classical securities. Digital securities may “convey the same legal rights with respect to a business enterprise” as an off-chain security or “entitle the holder to receive economic distributions from a central party that manages a business enterprise.”⁷

The release then discusses crypto assets that are themselves not securities but are subject to investment contracts that satisfy the Howey test for securities. According to the release, “[a] non-security crypto asset becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits.” The key elements are (i) representations or promises that create a reasonable expectation of profits and (ii) essential managerial efforts that may lead to such profits.

Whether a particular arrangement involving non-security crypto assets will satisfy the requirements of the Howey test and thereby render the arrangement an investment contract subject to the securities laws is a facts and circumstances inquiry. Moreover, an arrangement that began as an investment contract over time may cease to be one, such that it is no longer subject to the securities laws. If the issuer has fulfilled its promises to engage in managerial efforts, or has become unable to fulfill those promises, an essential element of the Howey test ceases to exist. At that point, the non-security crypto assets are no longer associated with an investment contract and are no longer subject to the securities laws. The developer may continue to provide administrative or ministerial services, but since they do not constitute essential managerial efforts, these services do not perpetuate the investment contract.

An entrepreneur intends to develop a new crypto network and associated crypto applications and publishes the milestones of the intended development. These development efforts constitute “essential managerial efforts.” To raise funding to finance the development, the developer offers tokens, some immediately and some on a delayed basis, that will be native to the network in exchange for cash investments. This arrangement constitutes an investment contract under the Howey test. The tokens themselves are non-security crypto assets. However, for as long as the investment contracts persist, the issuance of the tokens and their trading in the secondary market will be subject to the securities laws because of the associated investment contracts.

Eighteen months after the initial issuance of the tokens, the developer announces that all milestones in the development of the network and associated applications have been met and the network is fully functional. At this stage, the value of the tokens emanates from market forces of supply and demand. However, the developer continues to provide improved functionality, security patches, and bug fixes for the network. Because the developer is no longer providing essential managerial efforts, the tokens have ceased to be associated with an investment contract. As a consequence, trading in the tokens is no longer subject to the securities laws.

The core provisions of the proposed Regulation Crypto Assets are two exemptions from the registration requirements of the Securities Act for “covered investment contracts.” A covered investment contract would be defined as an investment contract that satisfies these criteria: (1) A crypto asset is subject to the contract; (2) the crypto asset itself is not a security; and (3) no asset other than this crypto asset is subject to the contract.

The two exemptions would allow for:

• offerings of up to $5 million over a four-year period, referred to as the “startup exemption”; and
• offerings of up to $75 million during any 12-month period, referred to as the “fundraising exemption.”

The issuance of “covered investment contracts” under either the startup exemption or fundraising exemption would also be exempt from state securities law regulation under Section 18(a) of the Securities Act.⁸

Required disclosures

All exempt offerings would require delivery of specified disclosures addressing:

1. the material terms of the investment contract, including a description of the representations or promises to engage in essential managerial efforts;
2. the material terms of the offering, including the number of units, distribution agreements, estimated sale proceeds, use of proceeds, and the address of a public website with offering materials;
3. a description of the subject crypto assets;
4. information regarding the issuer’s management, including conflicts of interest;
5. the material aspects of the associated crypto network or crypto application, including the issuer’s plan of development;
6. information regarding the security of the subject crypto asset;
7. various aspects of the subject crypto asset’s economics, such as supply, pricing, lockup and releases, methods of generating and destroying the crypto assets, and verification of transaction history;
8. the governance mechanism for the crypto network or application;
9. information regarding the ecosystem of the crypto asset, such as the technology infrastructure, types of participants and systems that use the crypto asset, and the associated network or application; and
10. a statement of risk factors.

The startup exemption

The startup exemption is intended to provide issuers with the ability to engage in smaller capital-raising activity, without registration, while they attempt to fulfill their representations or promises to develop, test, and launch their crypto networks or applications. The exemption would be subject to these conditions:

Duration. The exemption would be available for up to a four-year period, commencing on the date the issuer files a Form NOR (a “notice of reliance”) with the Commission. The period would end on the date the issuer files a Form TR (a “transition report”).

Issuer eligibility. The issuer may be an entity, individual, or group. If a group, each member would be required to sign the notice of reliance and transition report, and each would be responsible for satisfying the conditions of the exemption.

One-time use. The issuer could rely on the exemption only once with respect to the same subject crypto assets.

Offering limit. The gross proceeds for all offerings under the exemption for the subject crypto assets could not exceed $5 million. 

Disclosure and filing requirements. The issuer would be required to make the disclosures summarized above available on its website and to amend the information for any material changes.

General conditions. Among other things, the issuer could not be subject to the bad actor disqualifications of Regulation A.⁹ 

The notice of reliance would contain information about the issuer and the subject crypto assets and would include a certification that the issuer intends to fulfill its promises or representations regarding its management efforts within four years from the date of filing. 

The transition report would notify the Commission and the public that the issuer is no longer relying on the exemption from registration. Among other things, the report would have to certify whether or not the issuer has completed or otherwise ceased to provide management efforts, with an analysis supporting the certification. 

The fundraising exemption

 The fundraising exemption consists of two tiers:¹⁰

• Tier One. In a Tier One offering, an issuer would be permitted to offer up to $20 million in covered investment contracts in a 12-month period, including no more than $6 million offered by affiliates of the issuer.
• Tier Two. In a Tier Two offering, an issuer would be permitted to offer up to $75 million in covered investment contracts in a 12-month period, including no more than $22.5 million offered by affiliates of the issuer. 

The fundraising exemption would only be available for entities organized in the U.S. where (i) at least 50% of the executive officers or directors are U.S. citizens, (ii) more than 50% of the issuer’s assets are located in the U.S., and (iii) the issuer’s business is administered principally in the U.S. 

Issuers would be required to file offering statements, using a new Form 1-CRYPTO, that contain (1) the types of disclosures summarized above, (2) a discussion of the issuer’s financial condition, (3) financial statements of the issuer prepared in accordance with GAAP, and (4) specified exhibits. Tier One offerings would only require audited financial statements if they were otherwise prepared. Tier Two offerings would require audited financial statements regardless and would require compliance with Regulation S-X as if the issuer were a smaller reporting company.

Subject to certain exceptions, offers could not be made until the offering statement was filed with the Commission, and no sales could be made until the offering statement was qualified. The issuer would be subject to periodic, current, and transition reporting statements, similar to those required under Regulation A.¹¹

The proposed rules also address other securities law considerations for offerings under the fundraising exemption, including testing the waters, confidential treatment of initial filings, offering supplements, prospectus delivery requirements, continuous and delayed offerings, and suspension of reporting requirements.

Some additional securities law issues

Unrestricted securities. Investment contracts issued under either the startup exemption or the fundraising exemption would not be restricted securities under the securities laws and could be freely traded by non-affiliates of the issuer.

Nonaccredited investors. The investment contracts under either exemption may be sold to nonaccredited investors. However, a nonaccredited investor in an offering under the fundraising exemption cannot invest to the extent that its purchase price exceeds 10% of the greater of its annual income or net worth. 

General solicitation. Offerings under both the startup exemption and the fundraising exemption may be conducted by means of general (public) solicitation.

When a covered investment contract ceases to exist

Consistent with the views articulated by the Commission in its March 2026 release, the proposed rules will provide a nonexclusive safe harbor from the term “investment contract” under the Securities Act. If the criteria for the safe harbor are satisfied, the arrangements pursuant to which the crypto assets were issued will cease to be investment contracts, the subject crypto assets will cease to be associated with investment contracts, and crypto assets will thereafter trade free of application of the securities laws, including prospectively the anti-fraud rules.

A covered investment contract would cease to be an investment contract for securities law purposes if the issuer has completed or otherwise permanently ceased the essential managerial efforts that it represented or promised and does not intend to make any new representations or promises to engage in such efforts with respect to the same crypto assets. The issuer would have to file a transition report on Form TR, described above, certifying to the satisfaction of this condition, with supporting analysis.

The Clarity Act, which first passed the House in 2025, aims to provide a comprehensive framework for the regulation of the crypto sector. It would allocate regulatory responsibility between the Securities and Exchange Commission and the Commodity Futures Trading Commission, provide a framework for the regulation of stablecoins, establish a framework for regulation of applications that run on blockchains (so-called decentralized finance), implement consumer protections for cryptocurrency exchanges, and mandate certain ethical and anti-corruption guardrails.

Among other things, the 600-page proposed legislation lays out a framework for treatment of crypto assets under the federal securities laws that is very similar to the scheme that underlies Regulation Crypto Assets. Crypto assets—referred to as network tokens—would generally not be securities for purposes of the Securities Act, the Securities Exchange Act, the Investment Company Act, the Investment Advisers Act, or the Securities Investor Protection Act. Crypto assets whose value is dependent on entrepreneurial or managerial efforts—referred to as ancillary assets—would be subject to regulation under the securities laws as investment contracts. Treatment of ancillary assets as securities would terminate when such efforts cease to be a primary factor in token value.

On September 15, 2026, the legislation failed to advance in the Senate, with opposition based on aspects of the legislation unrelated to the securities law treatment of crypto assets. The act faces an uncertain future in the current congressional session, and its implications for adoption of Regulation Crypto Assets are unclear. 

The Commission’s proposed Regulation Crypto Assets is the implementation of its March 2026 concept release on crypto assets. It is not the crypto assets themselves (at least in most cases) that the federal securities laws regulate, but arrangements for investment in the development of crypto networks and applications providing for the issuance of the crypto assets. These arrangements will in many cases be investment contracts that are subject to the securities laws, and for as long as those investment contracts are in existence—because the developers of the networks and applications are still developing them—the crypto assets subject to those contracts will be securities by association. The proposed rules provide a measure of certainty in the area, both for what they cover and for what is excluded from their coverage. They are intended to be sufficiently broad so as not to be tethered to any specific form of crypto assets, crypto networks, or crypto applications. Unless and until the Clarity Act or something like it is enacted, Regulation Crypto Assets in the form adopted and other pronouncements of the SEC will be providing the framework for treatment of crypto assets under the federal securities laws.¹²

Footnotes

1  On September 16, 2026, the legislation failed to achieve the 60-vote threshold required to invoke cloture and bring the bill to a floor vote in the Senate. See “Landmark Crypto Bill Fails in Key Vote, Casting Doubt on New Rules and Hitting Stocks,” The Wall Street Journal, Sept. 15, 2026.

2 Following the failure of the Clarity Act to advance, on September 17, 2026, the SEC also issued an order granting temporary conditional exemptive relief, pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934, from the definition of an “exchange” in Section 3(a)(1) of the Exchange Act for the use of certain distributed ledger trading venues for tokenized NMS stocks—referred to as tokenized securities venues—and from the definition of “dealer” in Section 3(a)(5) of the Exchange Act for certain liquidity providers for tokenized NMS stocks in the form of automated market makers and liquidity pools (Release No. 34-106402). The exemptive relief will expire in five years.

3 The paradigmatic example of a digital commodity is Bitcoin (BTC). Other examples include Litecoin (LTC) and Bitcoin Cash (BCH).

4 Examples of digital collectibles include non-fungible tokens (NFTs) representing artwork or music, such as those offered through platforms like OpenSea or LooksRare; NBA Top Shot Moments, which are NFTs representing video highlights of basketball plays; in-game items such as character skins or weapons in blockchain-based video games; and digital trading cards, such as those offered by Topps Digital.

5 An example of non-fungible digital tools is Ethereum name service domains (ENS or .eth), which may be used for a variety of purposes such as sending and receiving crypto payments, decentralized web hosting and content access control. An example of a fungible digital tool is the membership tokens issued by Friends with Benefits ($FWB), a decentralized autonomous organization, that offer members specialized channel, exclusive media, and access to real-world events.

6 Examples of stablecoins include Tether’s USDT and Circle’s USDC.

7 Tokenized securities platforms that facilitate blockchain-based representations of conventional securities include Securitize, Inc. (NYSE:SECZ), a registered transfer agent that has issued tokenized representations of private fund interests and other securities on blockchain networks. Other participants in the tokenized securities space include Ondo Finance, which offers tokenized U.S. Treasury securities; Figure Technology Solutions, Inc. (NASDAQ:FIGR), which uses blockchain infrastructure to tokenize loan participations and equity securities; and tZERO, a regulated alternative trading system that supports the on-chain trading of tokenized securities and other real-world assets.

8 See Appendix I for a summary comparison of the two exemptions.

9 Regulation A disqualifies an issuer from relying on its exemption if the issuer or certain “covered persons”— including the issuer’s predecessors, affiliated issuers, directors, officers, general partners, managing members, beneficial owners of 20% or more of the issuer’s voting equity securities, promoters, and persons compensated for soliciting purchasers—are subject to certain “disqualifying events.” These include, among numerous events, a conviction in connection with the purchase or sale of a security or a judgment restraining or enjoining conduct in connection with the purchase or sale of a security. See Rule 262 under the Securities Act.

10 Under Regulation A, Tier One permits offerings of up to $20 million in securities in any 12-month period, and Tier Two permits offerings of up to $75 million in any 12-month period. See Rule 251 under the Securities Act.

11 Under Regulation A, Tier Two issuers are subject to ongoing periodic reporting requirements after the qualification of their offering statement. These include (i) annual reports on Form 1-K, due within 120 calendar days after the issuer’s fiscal year end, containing audited financial statements and a discussion of the issuer’s business and financial condition; (ii) semiannual reports on Form 1-SA, due within 90 calendar days after the end of the first six months of the issuer’s fiscal year; and (iii) current reports on Form 1-U, reporting the occurrence of certain material events within four business days. Reporting obligations under Regulation A may be suspended if the issuer has fewer than 300 holders of record and has filed all required reports for the relevant fiscal year. See Rule 257 under the Securities Act. Similarly, issuers under Tier Two of Regulation Crypto Assets would be required to file annual reports on Form 1-KC, semiannual reports on Form 1-SC, and current reports on Form 1-C.

12 See “Failure of Clarity Act Turns Crypto Industry Focus to Federal Regulators,” The Wall Street Journal, Sept. 18, 2026.