California Opposes SEC Crypto Plan Over Risk Concerns

What is Happening Between California and the SEC?

California financial regulators are challenging a new proposal from the U.S. Securities and Exchange Commission (SEC). State officials warn that the plan could limit their ability to review crypto offerings before they are sold to the public.

The Department of Financial Protection and Innovation (DFPI) outlined its opposition in a formal comment letter submitted to the SEC. While federal law lets states investigate securities fraud after it occurs, California wants to keep its power to screen investments before any sales happen.

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.

Understanding the SEC's Crypto Proposal

SEC Chairman Paul Atkins introduced the tailored framework, known as Regulation Crypto Assets, to help bring token issuers and capital formation into the United States. Under this proposal, crypto projects could raise capital through two main pathways:

• Startup Exemption: Early-stage projects could raise up to $5 million over a four-year period.
• Fundraising Exemption: Larger crypto projects could raise up to $75 million within a 12-month period.

To qualify for these exemptions, issuers must provide detailed disclosures explaining their project, business risks, and regular financial statements. Federal anti-fraud rules would still apply to all offerings.

The framework also introduces a conditional safe harbor. Under standard rules, an investment contract involves investing money in a common enterprise with an expectation of profit from others' efforts. Under the proposed safe harbor, a crypto asset would no longer be classified as an investment contract once the core team finishes or permanently stops their managerial work on the project.

How Industry Leaders and States Reacted

Several major crypto and financial institutions have weighed in on the SEC proposal with suggestions of their own:

• RippleXRP-0.57%: Requested specific trading safeguards for market participants.
• Coinbase (Nasdaq: COIN): Asked for clearer rules regarding secondary market token sales.
• Nasdaq (Nasdaq: NDAQ): Emphasized the need to keep strong protections for traditional securities, including tokenized stocks and funds.

Why California Remains Concerned About Scams

California state officials argue that removing pre-sale screening tools leaves investors vulnerable to fraudulent schemes. The DFPI reported adding nearly 200 crypto scams to its public tracker—a 30% increase compared to the previous year.

Regulators are also concerned that this simplified exemption framework might eventually expand beyond digital assets to traditional investment products. As a next step, California plans to explore existing state laws to target market manipulation and fraud in the digital asset space.

Additional SEC Proposals on Fund Custody

In a separate proposal, the SEC has also suggested updating rules to allow fund managers and investment advisers to self-custody digital assets. If approved, this change could give funds access to a wider variety of crypto investment strategies.

Past performance of digital assets or financial markets is not indicative of future performance. Investors should evaluate market volatility and operational risks before participating in digital asset offerings.