SEC could propose 'pivotal' crypto rules that may start with token safe harbor, TD Cowen says

The U.S. Securities and Exchange Commission may take a significant step toward establishing crypto regulations at a public meeting on Friday, according to investment bank TD Cowen.

Late Monday, the SEC announced it will consider whether to issue a proposal for new rules creating a tailored offering regime for certain investment contracts involving crypto assets. While the agency has not disclosed the details of the proposal, TD Cowen noted this could mark the first of several rulemakings aimed at delivering regulatory clarity for crypto assets, after the Senate failed to advance the Clarity Act on crypto market structure before the August recess.

"This could be a pivotal rulemaking," Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, said in a note. "We believe the goal is to establish a distinct disclosure and compliance regime for investment contracts involving crypto assets. This would be a way to offer these products without having to choose between following an onerous securities regulatory regime or accepting litigation risk."

The SEC previewed this proposal twice in March, Seiberg noted. SEC Chair Paul Atkins said in a speech at the time that the goal is to provide a clear path for issuers whose crypto assets are not securities but are offered through investment contracts. The SEC also issued a 68-page legal interpretation on how the securities laws apply to crypto assets, along with the Commodity Futures Trading Commission.

If Friday’s meeting centers on a proposal to implement what Atkins outlined in March, the SEC would establish a pathway allowing a crypto project to raise capital via an investment contract, develop its network, and eventually exit SEC oversight once the network no longer relies on the sponsor’s managerial efforts, Seiberg said.

"This may start with a safe harbor to permit a sponsor to sell tokens during the early stage of network development without those tokens being deemed securities," he said, noting there could also be a regulatory test for when a token transitions to being a commodity not subject to SEC rules.

The SEC could require projects relying on the exemption to file a whitepaper describing their tokens, development roadmap, token economics, governance, developer compensation, risks and custody arrangements, according to Seiberg.

Friday’s meeting and likely vote would only authorize the publication of proposed rules, not establish a final regime. If commissioners approve the release, the SEC is expected to publish the proposal and supporting fact sheets shortly after the meeting, Seiberg noted.