States Tell the SEC to Scrap Its Crypto Fundraising Rule as the Comment Window Closes

The comment window on the Securities and Exchange Commission's Regulation Crypto Assets closed on 20 October with no ceremony and no final rule. What the deadline did produce was the clearest map yet of who wants this framework and who intends to fight it — and the loudest objections did not come from the crypto industry. They came from the state regulators whose authority the proposal would switch off.

The proposal was released on 18 August 2026 and published in the Federal Register three days later, opening a 60-day comment period. By the time it closed, a 17-page letter from the association representing state securities administrators, a formal opposition from California's financial regulator and a pointed submission from Massachusetts' securities chief were all on the record, each asking the SEC to withdraw or substantially rewrite the rule.

What the SEC is actually proposing

Regulation Crypto Assets does three things at once. It creates two exemptions from Securities Act registration for offerings of what it calls covered investment contracts involving crypto assets. It creates a conditional safe harbor that lets a token stop being treated as part of an investment contract. And it preempts state securities registration and qualification requirements for the offerings it covers, along with certain secondary-market trades.

The first exemption is a one-time allowance of up to $5 million raised over four years. The second follows the architecture of Regulation A: a two-tier fundraising path of up to $20 million in Tier 1 and up to $75 million in Tier 2, measured over any 12-month period. Both rely on narrative, principles-based disclosure instead of the prescriptive forms a registered offering demands. The larger tier also requires financial statements and ongoing reports.

The safe harbor is the piece lawyers have been circling since August. A crypto asset can leave investment-contract territory once the issuer has completed, or permanently ceased, the essential managerial efforts it told investors it would perform — and makes no new promises of that work. Chairman Paul Atkins framed the whole package in August as a way to give founders "clear pathways to raise capital under the federal securities laws" while keeping "the investor protections at the core" of those laws.

None of it is in force. There is no effective date, no adopted text, and no assurance the package survives in its current shape.

The clause that turned a fundraising rule into a federalism fight

Most of the argument has nothing to do with tokens. It is about Proposed Rule 500, which would add a definition of "qualified purchaser" under Section 18(b)(3) of the Securities Act of 1933. Anything offered under the new exemptions would become a covered security, and covered securities are not subject to state registration or qualification requirements.

That single move changes the practical geography of a token sale. Today an issuer that wants to sell securities to Americans deals with a federal regime plus the registration or qualification rules of each state where it sells — which in practice means coordinated multistate review, and in some states a substantive look at whether the deal is fair. Under Rule 500, the state layer disappears for these offerings. The SEC's stated reason is that multistate review of covered investment contracts is difficult and inefficient.

The preemption would also reach certain secondary trades in those securities by anyone other than an issuer, underwriter or dealer. That detail is what turns a narrow accommodation into something closer to a market-structure decision.

What the states wrote

The North American Securities Administrators Association filed a 17-page letter on the deadline, signed by its president, Elizabeth H. Bowling of Tennessee. Its conclusion is blunt: "The Proposal should be withdrawn because it is bad policy that would endanger investors, harm other registrants, and weaken the securities markets generally."

Three arguments carry the letter. First, that the SEC lacks the statutory authority to preempt here at all, because Congress intended Section 18(b)(3) to cover investors sophisticated enough not to need state protection. Second, that defining "qualified purchaser" as anyone to whom a covered investment contract is sold empties the term of its meaning — the proposal, NASAA writes, identifies no investor characteristics that would make an ordinary retail buyer qualified. Third, that principles-based disclosure is "an invitation for crypto issuers to replace material information with marketing while omitting facts that could reveal poor business plans, conflicts of interest, ineffective management, or precarious financial conditions."

NASAA also flags immediate resale as a risk: without holding restrictions, insiders can sell into the retail demand the exemption was designed to create. And it calls the secondary-market preemption arbitrary and capricious, because the proposal asks whether preemption should extend to resales of securities sold under other federal exemptions without analysing what that would change.

Massachusetts' top securities regulator filed separately, writing that the SEC "should not move forward with Regulation Crypto Assets as written" and urging a registration pathway with full disclosure and substantive pre-qualification review instead.

California's Department of Financial Protection and Innovation filed on 20 October and publicised the letter a day later under a headline accusing the rule of standing ready to "spawn scams" and strip states of oversight. Commissioner KC Mohseni said the state "will not accept a coordinated attempt by federal regulators to override state authority and protections while stepping back from the oversight they are supposed to provide." Business and Consumer Services Secretary Rohit Chopra put it more briefly: the SEC's "gambit to muzzle state oversight will have real consequences."

The numbers the states are pointing at

California's letter cites a record $17 billion in losses to crypto scams in 2025 and argues that keeping only antifraud authority is not enough, because antifraud cases arrive after the money has moved while merit review screens an offering before anyone can buy. The department also says it added nearly 200 crypto-related entries to its scam tracker over the past year, a 30% increase.

That is the crux of the disagreement, and it does not resolve neatly. Supporters of the proposal would answer that state merit review is exactly the kind of gatekeeping that pushed token issuers offshore, and that federal antifraud enforcement plus tailored disclosure protects investors without a fifty-state approval process. The states' reply is that the disclosure in the proposal is too thin to support either enforcement or an investor's own judgement.

Where the industry landed

The industry did not speak with one voice, and almost nobody asked for the rule to be scrapped. Ripple backed the framework but asked for trading safeguards around tokens sold under it. Coinbase supported the direction and sought clearer rules for later token sales by issuers and affiliates. Nasdaq, which cares about a different corner of the market, argued for preserving investor protections for traditional securities, including tokenised stocks and funds.

Outside the United States, the MiCA Crypto Alliance supported the disclosure approach while asking for clearer treatment of asset rights and audit details. SkyBridge Capital backed the proposal outright. Even the supportive letters read as change requests, which is the normal fate of a first draft this large.

What it would change for an issuer

Today a US-facing token issuer has three unappealing options: register, which is slow and expensive; fit inside an existing exemption such as Regulation D, Regulation A or Regulation S, which constrains who can buy and how the tokens can trade; or stay offshore. If Regulation Crypto Assets is adopted as proposed, a US issuer could raise up to $75 million in a 12-month window with narrative disclosure, financial statements and ongoing reports — and, because of Rule 500, without registering in any state.

The conditions are where issuers should look hardest. The safe harbor requires permanently ceasing the managerial efforts the offering promised. That is a one-way door: a project that later wants to resume central direction of the asset has already told investors, in a filing, that it would not. And the disclosure standard is undefined enough that the first enforcement case will define it, which is a poor substitute for knowing the rules in advance.

There is also a structural risk that has nothing to do with the SEC's intent. If a final rule preempts state law and a court later finds the preemption invalid, offerings made in reliance on it could be characterised as unregistered sales in dozens of states at once. The state letters read like the opening brief of that case.

Why the timing is awkward

The SEC is writing this rule while the market-structure legislation that was supposed to settle the same questions sits unresolved in the Senate, where the CLARITY Act has been through repeated amendment fights without reaching a vote. Regulators are filling a gap Congress has not closed, and the result is a framework that could be partially overtaken by statute — or left as the only federal answer for years.

The proposal's own question list reinforces the sense that this is not near final. When a releasing release asks commenters whether a central feature should be narrower, the usual outcome is a re-proposal rather than an adopting release. Add the litigation risk and the odds of a clean, fast finalisation look low.

What to watch next

Four things will decide how this lands. Whether the SEC re-proposes or moves to a final rule, and on what timetable. Whether Rule 500 survives in any form, since the exemptions are worth far less to issuers without it. Whether a state or an industry group sues immediately after adoption. And whether California follows through on its statement that it will examine other longstanding laws it could use against market manipulation and deceit — a signal that states intend to keep jurisdiction by other means.

For context on how the SEC has been handling adjacent questions, our coverage of its five-year sandbox for tokenised US stocks and of the CLARITY Act's stalled markup show the same pattern: accommodation offered through agency process while legislation stalls.

The state of play

Strip away the politics and the choice is narrow. Crypto fundraising either gets a lighter federal path with one reviewer, or it gets a lighter federal path with fifty reviewers still watching. The SEC proposed the first and called it efficiency. The regulators who would lose their seat at the table have now said, in detail and on the record, that they will not go quietly — and they have built their argument on the words of the statute the SEC is relying on.

Nothing changes for issuers this week. The proposal is still a proposal, the exemptions are still unavailable, and the state rules still apply. But the comment record that closed on 20 October is now the document a court, a future commission or a congressional committee will read first, and it says the fight over who regulates token sales is not close to over.