California Challenges SEC Crypto Proposal Over Reduced State Oversight of Offerings

California’s Department of Financial Protection and Innovation has formally opposed a Securities and Exchange Commission proposal that would create new federal exemptions for certain cryptocurrency-related securities offerings.

In a comment letter filed on the October 20, 2026 deadline, state officials argued that the plan, known as Regulation Crypto Assets, would undercut longstanding investor safeguards by limiting states’ ability to examine offerings before they reach the market.

The SEC released the proposal in August 2026 as part of efforts to establish a dedicated framework for capital raising involving digital assets while Congress had not advanced broader legislation such as the CLARITY Act.

It would establish two principal pathways that exempt qualifying issuers from full federal registration under the Securities Act of 1933.

One is a startup exemption permitting up to $5 million in offerings over a four-year period.

The other is a tiered fundraising exemption modeled in part on existing Regulation A rules, allowing raises of up to $75 million in any 12-month period (with a lower tier at $20 million).

Issuers would still face principles-based disclosure obligations and remain subject to federal antifraud and antimanipulation rules.

A conditional safe harbor addressing when an asset might no longer be treated as an investment contract is also included.

California’s core objection centers on Proposed Rule 500.

That provision would redefine “qualified purchaser” under Section 18(b)(3) of the Securities Act so that offers and sales made under the new exemptions, along with certain secondary market transactions, would be treated as covered securities.

The practical effect would be federal preemption of state registration and qualification requirements—often called blue-sky laws—while leaving states with antifraud authority and the ability to require notice filings.

State regulators contend this removes a critical screening layer that has historically allowed them to identify and block high-risk, volatile, or potentially abusive offerings before sales occur.

Officials emphasize that the approach exceeds the authority Congress granted in the National Securities Markets Improvement Act of 1996.

That statute contemplated preemption primarily for offerings directed at financially sophisticated investors who could protect their own interests, not ordinary retail purchasers in complex digital asset deals.

By defining qualified purchaser simply as anyone offered or sold a covered investment contract under the new rules, the proposal would effectively treat typical retail buyers as sophisticated for preemption purposes.

California argues this logic has no inherent boundary and could later be applied to other investment products beyond crypto.

The state, described as the world’s fourth-largest economy, has long reviewed securities offerings to screen out unfair or fraudulent practices.

Its Department of Financial Protection and Innovation points to continued high losses from crypto-related scams—citing FBI Internet Crime Complaint Center data showing a record $11.3 billion in 2025—and a roughly 30 percent year-over-year increase in entries on its own Crypto Scam Tracker.

Retaining only after-the-fact antifraud enforcement, officials say, is insufficient; pre-sale merit review helps prevent harm at the outset, particularly when federal enforcement priorities have shifted.

Business and Consumer Services Secretary Rohit Chopra and DFPI Commissioner KC Mohseni framed the filing as part of broader resistance to federal measures that reduce state oversight while stepping back from active enforcement.

The department has indicated it will continue evaluating existing state tools to address market integrity concerns. The public comment period on the SEC proposal closed on October 20, 2026, and the agency has not yet issued a final rule.