California’s financial regulator has opposed a proposed US Securities and Exchange Commission (SEC) framework for crypto fundraising, warning that it could remove important safeguards by restricting the state’s ability to review investment offerings before they reach the market.
The Department of Financial Protection and Innovation (DFPI) set out its objections on 21 October after submitting a comment letter on Regulation Crypto Assets. Commissioner KC Mohseni said the proposal could weaken preventive measures used to identify fraud, deception and unlawful conduct by brokers and dealers.
Federal securities law would continue to preserve states’ powers to investigate those offences. However, California’s objection centres on proposed limits to state registration and qualification requirements, which officials say would reduce their ability to screen potentially risky investments in advance.
Under the SEC’s plan, qualifying issuers would be able to raise up to $5 million over four years through a startup exemption. A separate crypto fundraising exemption would allow companies to raise as much as $75 million in any 12-month period.
Both exemptions would require narrative disclosures, including written information about a project, its risks and other details investors would need when assessing an offering. The broader proposed crypto offering framework would also introduce financial statement and continuing reporting requirements for fundraising under the scheme. Existing federal anti-fraud rules would remain in force.
SEC Chairman Paul Atkins has described tailored crypto exemptions as a way to attract issuers and encourage capital formation in the United States. Under the proposal, an investment contract generally refers to an arrangement in which money is placed into a common enterprise with profits expected to come from the managerial work of others.
A conditional safe harbour would allow a crypto asset to stop being treated as part of an investment contract once specified legal conditions had been met. Those conditions include the completion or permanent ending of promised essential managerial efforts on which investors relied to achieve expected profits.
The proposal has attracted support from blockchain payments company Ripple, crypto exchange Coinbase (Nasdaq: COIN) and exchange operator Nasdaq (Nasdaq: NDAQ), although each has requested changes. Ripple is seeking safeguards for trading, Coinbase wants greater clarity around later token sales, and Nasdaq has stressed the need to retain investor protections for traditional securities, including tokenised stocks and funds.
California officials said continuing crypto investment fraud was a reason to maintain state oversight. The DFPI reported adding nearly 200 crypto-related scams to its tracker, representing a 30% rise from the previous year.
They also warned that the proposed approach might eventually affect investment products beyond digital assets. California said it would review other longstanding laws that could be used to tackle market manipulation and deception.
