What the SEC’s proposed crypto framework could teach Hong Kong about early-stage capital formation
On August 18, the US Securities and Exchange Commission proposed an important new capital-formation framework for blockchain startups.
The proposed rules, titled Regulation Crypto Assets, would introduce two exemptions for certain investment contracts involving crypto assets.
The first—a startup exemption—would allow eligible projects to raise up to $5 million over four years. A broader fundraising exemption would allow eligible issuers to raise up to $75 million within a 12-month period, subject to more extensive financial disclosures and ongoing reporting.
The proposal is not yet final. It will go through public consultation and could change before adoption. It also does not remove the need for Congress to establish a durable division of responsibilities between the SEC and the Commodity Futures Trading Commission through legislation such as the CLARITY Act.
Nevertheless, it could represent a significant change in how the United States approaches blockchain-based capital formation.
Why blockchain startups need a different funding route
Startups building decentralized networks face an unusual financing challenge.
Like conventional technology companies, they need money to develop software, hire engineers, conduct security audits, establish infrastructure and attract early users.
Unlike an ordinary software company, however, their intended product may not remain permanently controlled by the founding corporate entity. The objective may be to create a network that eventually operates with reduced dependence on its original developers.
Tokens can play several roles in such a network. They may be used to:
- pay for services;
- reward infrastructure providers;
- incentivize early participation;
- coordinate governance;
- secure the network;
- provide access to an application.
Historically, US projects faced uncertainty over whether selling tokens to finance development constituted an unregistered securities offering—and whether those tokens would remain subject to securities regulation after the network became operational.
The SEC proposal attempts to create both a regulatory on-ramp and an eventual off-ramp.
A startup exemption built around network development
Under the proposed startup exemption, an eligible project could raise up to $5 million over a period of up to four years.
Before conducting the offering, the issuer would file a notice with the SEC and publish principles-based disclosures covering matters such as:
- the terms of the offering;
- the development work being promised;
- the associated network or application;
- token economics and allocations;
- governance arrangements;
- cybersecurity;
- conflicts of interest;
- material risks.
The exemption would not require audited financial statements or restrict participation to accredited investors. Issuers would, however, remain subject to federal antifraud and antimanipulation provisions and would need to keep material information updated.
This could give early-stage blockchain ventures a clearer route to raise their first few million dollars while providing investors with standardized information about what the project has promised to build.
A complement to venture capital
Token-based fundraising does not need to replace venture capital or private equity. The two approaches can serve different purposes.
A blockchain venture may involve both:
- a company with shareholders, employees and intellectual property; and
- a network with users, developers, validators and token holders.
VCs could invest in the company, the network’s tokens or a structured combination of both.
Equity could finance the corporate team and provide ownership rights in the business. Tokens could be distributed more widely to encourage participation and establish economic activity around the network.
A clearer regulatory framework may also make token financing more credible to institutional investors. Rather than relying on uncertain interpretations or offshore structures, investors could evaluate projects against a defined disclosure standard.
From startup project to operational network
Perhaps the most significant part of the proposal is its conditional safe harbor.
During a project’s early stages, a token offering may involve an investment contract because purchasers rely on the founding team’s promises to develop the network. That relationship may change after the team completes—or permanently stops—the essential managerial work it promised.
Under the proposal, an issuer could file a transition report certifying that this work had ended and that it was not making new promises to perform it.
If the safe-harbor conditions were satisfied, the underlying non-security crypto asset would no longer be treated as subject to that investment contract.
Conceptually, the lifecycle could look like this:Startup fundraising→Network development→Operational network→Independent crypto asset
This recognizes that financing a decentralized network is not always the same as financing a conventional company.
What the proposal does not cover
The proposal would not allow any startup to issue tokenized shares under this new exemption.
If an AI or fintech company represented its common stock, preferred shares or employee equity as tokens, those instruments would still be securities. Putting shares on a blockchain changes their format, not their legal character.
Regulation Crypto Assets is focused on certain investment contracts involving crypto-native assets that are not themselves stocks, bonds or other conventional securities.
It also does not resolve every question around secondary trading, custody, taxation or the regulation of platforms on which the tokens might trade. Further legislation and regulatory coordination will still be necessary.
A positive development—and an opportunity for Hong Kong
I see the SEC proposal as a very positive development for blockchain startups and investors, although I would not attribute the recent crypto-market rally to this announcement alone. It formed part of a wider shift that included the White House meeting with financial and crypto executives, renewed support for the CLARITY Act, discussion of tokenization and the unexpected reference to bringing Hyperliquid within the US regulatory framework.
From Hong Kong, the more important question is what happens next. Despite being an international financial centre, Hong Kong continues to have a difficult early-stage funding environment. Private-equity capital naturally focuses on more mature businesses, while venture investors can be highly selective when faced with smaller addressable markets, uncertain exits and the risks associated with early-stage technology. Many promising fintech and blockchain startups therefore struggle to secure the initial capital needed to build and demonstrate their ideas.
A regulated token-based funding pathway would not solve this problem by itself, nor should it replace conventional venture capital. But it could broaden the available financing options, bring new investors into early-stage projects and provide a more transparent and traceable framework for raising and deploying capital.
Hong Kong has already established important foundations in virtual-asset regulation and tokenized finance. Can our government and regulators now study the SEC proposal, improve on it and move faster—creating a credible capital-formation pathway that attracts blockchain entrepreneurs, investors and technical talent? The US proposal will take time to develop. That gives Hong Kong an opportunity not merely to follow, but to lead.
References
- SEC: Regulation Crypto Assets—Proposed Rule
- SEC: Press Release Announcing Regulation Crypto Assets
- SEC Chairman Paul Atkins: Statement on Regulation Crypto Assets
- SEC: Application of Federal Securities Laws to Certain Crypto Assets
- SEC: Statement on Tokenized Securities
- Congress.gov: Digital Asset Market Clarity Act
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