California has formally opposed the U.S. Securities and Exchange Commission’s (SEC) proposed new “Regulation Crypto Assets”, warning that the federal plan could weaken investor protections by limiting states’ ability to review digital‑asset offerings before they reach the market.
In a detailed comment letter submitted on October 21, the Department of Financial Protection and Innovation (DFPI) argued that the SEC’s exemptions and preemption mechanisms would strip states of critical oversight tools, reduce preventive screening, and expose retail investors to higher risks.
The dispute shows a growing tension between federal efforts to streamline crypto fundraising and state regulators’ mandate to police fraud, deceit, and unlawful broker conduct.
California’s Objection: A Threat to Preventive Investor Screening
California’s DFPI warned that the SEC’s proposal would significantly weaken the state’s ability to screen crypto offerings before they are sold to the public. Under current federal securities law, states retain authority to investigate fraud and enforce registration and qualification requirements.
The SEC’s proposed exemptions, however, would limit these state‑level tools by allowing issuers to bypass certain registration obligations if they meet federal criteria.
DFPI Commissioner KC Mohseni emphasized that California supports innovation but will not accept federal attempts to override state protections while simultaneously reducing federal oversight.
Mohseni stated that the proposal represents a “coordinated attempt” to weaken state authority at a time when crypto‑related fraud continues to rise.
California’s concern is rooted in its long‑standing role as a frontline regulator of investment products. The state regularly reviews securities offerings to prevent abusive practices and has added nearly 200 crypto‑related fraud cases to its tracking list; an increase of 30% year‑over‑year.
Regulators fear that losing preventive screening tools would leave investors more vulnerable to deceptive or high‑risk digital‑asset sales.
Exemptions and Disclosure Requirements under the New SEC Rule
The SEC’s proposed Regulation Crypto Assets introduces two major fundraising exemptions:
- A startup exemption allowing qualifying issuers to raise up to $5 million over four years
- A crypto‑specific fundraising exemption permitting up to $75 million per 12‑month period
Both exemptions require narrative disclosures, including written explanations of the project, associated risks, and other information investors need to evaluate an offering.
The crypto fundraising route also mandates financial statements and ongoing reporting obligations. Federal antifraud provisions would continue to apply.
The SEC argues that these exemptions would encourage capital formation and bring more crypto issuers into regulated channels. Chairman Paul Atkins has framed the proposal as a tailored approach that balances innovation with investor protection.
A key feature of the proposal is a conditional safe harbor that allows a crypto asset to cease being treated as an investment contract once certain legal conditions are met, specifically, when promised essential managerial efforts are completed or permanently ended.
The mechanism aims to clarify when tokens transition from securities to non‑securities.
California’s Regulatory Position
California’s opposition is consistent with its bigger regulatory stance. As the world’s fourth‑largest economy, the state has historically played a central role in reviewing securities offerings and enforcing investor‑protection laws.
DFPI argues that the SEC’s proposal undermines this role by restricting state registration and qualification requirements.
The department also notes that the SEC’s approach could weaken oversight of digital‑asset custodial practices. The SEC has separately proposed allowing investment advisers and investment trusts to self‑custody crypto assets; an idea California views as potentially risky without strong state‑level controls.
California regulators are evaluating additional legal tools to address market manipulation and fraud, indicating that the state may expand enforcement efforts if federal oversight diminishes.
