Key Takeaways
- DFPI opposed the SEC proposal in a comment letter to the agency.
- Proposed exemptions would permit qualifying raises up to $75 million.
- States would retain authority to investigate securities fraud.
California Warns of Weaker Investment Screening
Investors could lose a layer of protection against risky crypto offerings under a federal proposal, California’s financial regulator warned on Oct. 21. The Department of Financial Protection and Innovation (DFPI) outlined its opposition to Regulation Crypto Assets after submitting a comment letter to the U.S. Securities and Exchange Commission (SEC).
DFPI Commissioner KC Mohseni stated:
“California champions innovation and the entrepreneurs who drive it. What we will not accept is a coordinated attempt by federal regulators to override state authority and protections while stepping back from the oversight they are supposed to provide.”
Federal securities law preserves states’ authority to investigate fraud, deceit, and unlawful broker or dealer conduct. California’s objection focuses on losing preventive screening tools through federal limits on state registration and qualification requirements.
SEC Sets Offering Limits and Disclosure Duties
Qualifying issuers could raise up to $5 million over four years through a startup exemption, while a separate crypto fundraising exemption would permit up to $75 million per 12-month period.
Both routes would require narrative disclosures: written explanations of the project, its risks, and other information investors need to evaluate an offering. The SEC’s proposed crypto offering framework would also require financial statements and ongoing reporting under the fundraising route. Federal antifraud provisions would continue to apply.
Chairman Paul Atkins has presented tailored crypto exemptions as a way to bring issuers and capital formation to the United States. An investment contract generally involves investing in a common enterprise with expected profits derived from others’ managerial efforts.
A conditional safe harbor would allow a crypto asset to cease being subject to an investment contract when specified legal conditions are met. These include completing or permanently ending promised essential managerial efforts, the work investors rely on to generate expected profits.
Industry Support Contrasts With State Fraud Concerns
Industry support includes blockchain payments company Ripple, crypto exchange Coinbase (Nasdaq: COIN), and exchange operator Nasdaq (Nasdaq: NDAQ), each seeking changes to the SEC proposal. Ripple requests trading safeguards, while Coinbase seeks clearer rules for subsequent token sales. Nasdaq emphasizes preserving investor protections for traditional securities, including tokenized stocks and funds.
State officials cite continuing exposure to crypto investment fraud schemes as grounds for preserving oversight. DFPI reported adding nearly 200 crypto-related scams to its tracker, a 30% increase from the previous year.
Officials also warn the proposed approach could extend beyond digital assets to other investment products. California plans to examine other longstanding laws it could use to address market manipulation and deceit.
