The US Securities and Exchange Commission's proposed Regulation Crypto Assets rules could finally make public token sales easier in the United States after what feels like a lifetime in the making. The proposal would allow qualifying issuers to raise as much as $75 million during any 12-month period, and it could let projects return to investors year after year for additional funding as they build out their networks. That would create a new, staged model for token fundraising and could make early allocations more attractive to investors betting on higher valuations later.

Before putting the champagne on ice, however, the rules are unlikely to revive the freewheeling initial coin offering mania of 2017, according to Lee Reiners, a lecturing fellow and financial regulation expert at Duke University.

“My initial view is that the $75 million exemption could make public token offerings more feasible, but it is unlikely to produce a return to the ICO boom,” Reiners tells Magazine.

Could projects raise $75 million every year?

The SEC's proposal, unveiled on Aug. 18, creates two exemptions for certain investment contracts involving crypto assets. The first is a one-time exemption for startups covering offerings of up to $5 million over four years. The second is a larger fundraising exemption permitting up to $75 million in each 12-month period; it is modeled in part on Regulation A — the existing “mini-IPO” pathway that likewise caps issuers at $75 million per year — and carries disclosure and ongoing reporting requirements.

Does the rolling nature of the $75 million limit mean a project could simply raise $75 million, build for a year, and then come back for another $75 million? The answer appears to be yes.

Drew Hinkes, a partner at Winston Taylor, tells Magazine that the 12-month limitation would allow for “serial raises” of $75 million every 12 months, “provided they are actually distinct offerings.”

So what's the catch? Lilya Tessler, a partner and leader of Sidley's Global FinTech and Blockchain group, says that while “nothing prevents an issuer from relying on the exemption more than once,” each raise “isn't automatic.” Subsequent raises would require filing a new offering statement and undergoing an SEC staff review, and issuers would have to keep filing annual and semiannual reports. They would also need to “disclose what the issuer raised under the exemption in the prior 12 months so the cap can be verified,” Tessler says.

Even so, the proposed rules would be a substantial upgrade from the status quo. A project seeking $225 million in total, for example, could potentially raise the funds in chunks and return to investors later with a more developed network — and a higher valuation.

Could a cap create ICO-style FOMO?

That raises another obvious question: could the $75 million ceiling make early token allocations more sought-after, unleashing a frenzy of get-rich-quick-induced FOMO in the first round?

Possibly. Reiners says that is one potential outcome: “If investors expect a successful issuer to conduct later offerings at a higher valuation, an initial allocation may become more attractive precisely because it is limited.”

That dynamic, however, is not dissimilar to how many token and equity sales are currently structured. SpaceX sold fewer than 5% of its total equity during its recent IPO.

“Scarcity in both token sales and exempt securities offerings of traditional securities long predate this proposal — issuers have always been able to limit round sizes and can continue to do so,” says Tessler.

Non-accredited investors, meanwhile, will not be able to go “all in” on any one token sale as they have in the past. Tessler says the SEC's proposal limits them to buying “10% of the greater of their income or net worth,” regardless of which round they participate in. That limit mirrors the retail-investor protections already built into Regulation A, the framework the larger exemption is modeled on.

Why this probably won't be 2017 all over again

There are other reasons not to expect 2017 to return — not least because a generation of crypto investors has been burned by the extravagant promises and terrible tokenomics of previous ICOs. Up to 90% of projects funded via ICOs between 2017 and 2019 ended up failing. Reiners points out that fundraising markets are “shaped by investor appetite, token economics, liquidity, custody, and the reputational damage left by the last ICO cycle.”

The SEC estimates that around 130 offerings would use the two new exemptions each year, and that around 475 issuers will potentially use the broader investment contract safe harbor. That is less of a tsunami and more of a steady trickle.

Still, the SEC proposal is a very positive development for token issuers trying to navigate the legal minefield around securities laws in the US — the kind Tezos and Telegram would have chewed their right arms off for after their multimillion-dollar US securities-law battles. In the years since that enforcement era, US token fundraising has largely retreated to private placements open only to accredited investors or to offshore structures that exclude American buyers, which is why a pathway that ordinary investors can actually access would mark a real shift. Rather than force issuers to self-evaluate whether their offerings fit within existing securities law frameworks, the SEC is proposing an explicit regulatory pathway for raising capital. As crypto lawyer Jake Chervinsky says, “not one day too soon.” The exemptions cannot be relied on just yet, though: as a proposal, the rules must first clear a public comment period and possible revision before final adoption.

What happens when the token starts trading?

There are some potential minefields, though. The SEC's proposal says the investment contract associated with a crypto asset can continue to transfer to subsequent purchasers in secondary market transactions until the crypto asset separates from the issuer's representations or promises. In other words, if the team selling a non-security token suggests that investors in the secondary market can reasonably expect to profit from essential managerial team efforts, then it could become subject to an investment contract.

Hinkes sees that creating a potential problem: “If a transaction of a non-security covered crypto asset causes the transfer of the investment contract from cryptoasset seller to cryptoasset buyer, there is a risk that the sale of the crypto asset would be viewed as a securities transaction.”

That could become a problem for exchanges and other trading venues. How that transfer provision is worded in the final rules — and how trading venues adapt to it — is one of the key details to watch as the proposal moves through the comment process.

A new route for fundraising — but old risks remain

The potential for tokens to fall into a no-man's-land between security and non-security also worries Reiners. He says projects could learn how to operate within the new framework without addressing the underlying investor protection concerns:

“A public offering exemption could become a vehicle for regulatory arbitrage [...] A token issuer may satisfy the formal conditions for an exempt sale while continuing to market an asset whose value depends heavily on the issuer's managerial efforts.”

That would leave retail investors in the same grey area as a decade prior, exposed to “opaque disclosures, concentrated insider holdings, and aggressive promotion.”