Galaxy Research says the US Securities and Exchange Commission's proposed Reg Crypto framework could hand hundreds of tokens already in circulation a formal route out of investment contract status, potentially settling one of the longest-running questions in crypto securities law.

In an analysis published Aug. 21, Galaxy argued that the proposal could replace years of uncertainty over when an investment contract tied to a token ends with something far simpler: a filing and a recorded date.

Alex Thorn, Galaxy's head of firmwide research, said the first visible effect of the framework would likely be the resolution of securities-law questions surrounding tokens already trading, rather than a fresh wave of public token sales. That matters because the proposal appears aimed not only at future fundraising, but also at projects that have lived for years in a gray area while trying to judge whether a token's original issuance still carries securities-law consequences.

The SEC estimated that about 475 issuers would file transition reports under the investment contract safe harbor each year, compared with approximately 130 annual offerings expected across the proposal's two new fundraising exemptions. According to Galaxy, that gap suggests existing projects may have more immediate use for the exit process than new issuers have for the fundraising routes.

"Reg Crypto could provide meaningful regulatory clarity, but only Congress can make that clarity durable," Thorn said.

A formal exit for legacy tokens

Under the proposal, the safe harbor would apply to a crypto asset that is not itself a security but was issued or sold as part of an investment contract. Tokenized stocks, bonds, and arrangements combining tokens with equity or another security would fall outside the framework.

An issuer could invoke the safe harbor after completing — or permanently ending — all essential managerial work promised to buyers. The issuer must also stop making new promises to perform such work and file a transition report with the SEC.

Once those requirements are met, the related investment contract would be treated as terminated under both the Securities Act and the Securities Exchange Act. The token itself could continue to exist and trade without remaining tied to the original contract.

Galaxy described the framework as a workable legal model for a token's lifecycle: the investment contract would begin when the asset is issued and end once the issuer's promised work is finished. Unlike corporate stock, a token would not carry permanent securities treatment solely because it was once distributed through an investment contract.

Issuers would drive the process by filing Form TR and certifying that they met the conditions, although an earlier comparison of the frameworks noted that the SEC would retain the power to challenge a certification.

Projects would not need to have used either Reg Crypto fundraising exemption to seek the safe harbor. Galaxy said the standalone route is therefore relevant to tokens issued years before the proposal, including assets whose legal position has remained unsettled through regulatory speeches, enforcement settlements, and court cases.

The SEC estimates that preparing a standalone transition report would require an average of 30 burden hours, including work performed by outside professional service providers. Galaxy said the expected workload means most issuers would probably need legal or compliance support to complete the process.

Two exemptions would open token sales to US investors

Alongside the safe harbor, Reg Crypto proposes two exemptions from the registration requirements of the Securities Act of 1933.

As crypto.news previously reported in its coverage of the $75 million exemption, the startup route would allow an issuer to distribute up to $5 million in covered investment contracts during a maximum four-year period. The one-time exemption would require public filings at the beginning and end of the period.

A second route, modeled on Regulation A, would contain two tiers. Tier 1 would permit an issuer to raise up to $20 million in 12 months, while Tier 2 would raise the ceiling to $75 million over the same period.

Offerings under the second route would require SEC qualification, financial statements, and continuing reports. Tier 2 issuers would also need audited financial statements and substantial organizational, management, and asset ties to the United States.

For unaccredited investors, the purchase limit would equal 10% of annual income or net worth, whichever figure is higher. Galaxy said the provision would give US retail buyers lawful access to qualifying token distributions while imposing a defined exposure limit.

Covered investment contracts sold through either exemption would not be restricted securities under the proposal. Unless the issuer added a separate contractual restriction, buyers could resell them immediately, without a federal holding period.

Galaxy identified the absence of a resale lockup as a potentially important feature for projects that want tokens to circulate among users rather than remain with venture investors. The research firm also noted that issuers would accept detailed disclosure and reporting duties in exchange for that flexibility.

Token disclosures would differ from stock filings

Rather than relying only on disclosure rules written for corporate shares, Reg Crypto would require information tied to how digital assets actually operate.

Issuers would need to disclose token supply, release schedules, minting and burning systems, governance arrangements, and smart contract permissions. Required information would also include source code, the structure of the project's ecosystem, development promises, and progress toward completing them.

Galaxy said the list addresses information that token buyers use when assessing a project but that may not appear in a conventional equity filing. Token ownership does not necessarily confer the voting, dividend, or liquidation rights attached to corporate stock, which makes supply controls and smart contract access more relevant to the investment decision.

Even with the new pathways, Thorn questioned how many projects would choose the fundraising exemptions. Rule 506 under Regulation D already permits uncapped offerings without an SEC qualification process or continuing public reports, although it does not offer the same public distribution route to non-accredited buyers.

Offshore structures could present another obstacle for larger offerings. According to Galaxy, token projects often use overseas foundations for governance, treasury management, and tax planning, while the larger Reg Crypto exemption would require much of the issuer's organization, management, and assets to sit in the United States. The startup exemption does not impose the same US incorporation condition, and Galaxy said smaller domestic offerings could therefore use the $5 million route more readily, despite its lower ceiling.

What the SEC rules would leave unresolved

Reg Crypto would preempt state registration and qualification requirements for covered primary offerings and certain secondary transactions, provided that the issuer remained current with its obligations. State antifraud authority would continue to apply.

The proposal does not establish rules for exchanges, brokers, dealers, or custodians. It also does not determine whether a token that leaves investment contract status becomes a commodity under the Commodity Futures Trading Commission's supervision. A separate analysis of Reg Crypto found that the safe harbor could therefore remove SEC treatment without assigning the token to another federal regulator.

The CLARITY Act would address that question through legislation dividing oversight between the SEC and CFTC. Galaxy warned that an agency rule could also be changed by a future commission, while federal legislation would carry more permanence and would override any conflicting SEC rule if Congress enacted it.

The Senate has scheduled a Sept. 15 procedural test for the CLARITY Act, according to recent Senate vote coverage. The cloture motion needs 60 votes and would only allow the chamber to begin considering the bill, not approve its final passage.

The SEC published Reg Crypto in the Federal Register on Aug. 21 under docket S7-2026-27. Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda issued statements supporting the proposal, and the public comment period remains open until Oct. 20.

Source: crypto.news