Securities Regulation Daily Wrap Up, BLOCKCHAIN—Better Markets, ‘Shadow SEC’ comment against crypto assets proposal, (Oct 21, 2026)

By Anne Sherry, J.D.

Both letters suggest the SEC is obliging the crypto industry.

Two comment letters urge the SEC to repropose or outright withdraw Regulation Crypto Assets, the proposed framework for non-security crypto assets subject to an investment contract. A group of law professors known as the “Shadow SEC” says that while the proposal does some things right, it suffers from two fundamental overreaches when it carves out crypto assets from certain registration and disclosure rules. Better Markets says that the agency’s failure to justify making exceptions for crypto means the proposal should be withdrawn.

Both letters take issue with the proposal’s failure to address the risk of fraud in crypto offerings and the singling out of crypto assets from a regime in which an offering must be registered unless an exemption applies.

Shadow SEC. The Shadow SEC comprises John Coates, John C. Coffee, Jr., James D. Cox, Merritt B. Fox, and Joel Seligman. As their comment letter, they attached the 15th in their series of blog posts criticizing the Trump Administration’s approach to the SEC.

“Regulation Crypto as proposed is deeply flawed,” the critique begins. The professors say that the SEC has not made the case for treating an investment contract differently because it is based on a digital asset. Furthermore, the proposal overstates the case for principles-based disclosure, ignoring the flexibility inherent in the existing regime.

The Shadow SEC posits that the current system of Securities Act exemptions is working, raising the question of whether Regulation Crypto Assets is needed at all. The Commission heavily considered comments from industry participants who have an interest in reduced disclosure, but the release does not consider how that might affect the risk of fraud in crypto offerings. Instead, the SEC is focused on facilitating capital raising.

Furthermore, the proposal mischaracterizes the current disclosure framework as “inflexible.” In reality, management has broad discretion on how to disclose under Regulation S-K, including the Management Discussion and Analysis. And SEC enforcement has adopted the applicable disclosure rules to the realities of each industry or even issuer.

The professors give the proposal credit for acknowledging that existing disclosure requirements do not address many topics relevant to crypto asset investors and enumerating examples of these types of information. Still, this information, when material, is already required (or could easily be addressed) under Regulation S-K.

The group urges that the regulation should be reproposed at the very least. “Resale, as the Securities Act clearly directs, requires either registration or an exemption. It does not permit the creation of a new breed of sacred cows regardless of how much industry commenters would prefer this,” the professors concluded.

Better Markets. Industry watchdog group Better Markets said that the SEC should withdraw the proposal. Like the Shadow SEC, Better Markets emphasizes that registration is the default rule under the Securities Act, which recognizes exemptions for transactions that carry less risk. There is nothing about crypto offerings that suggests less need for investor protection; the evidence establishes the opposite, the comment letter states. But the proposal does not address the prevalence of fraud in crypto assets.

“The SEC is not supposed to ‘facilitate capital formation’ by making it as easy as possible for issuers to raise money from an unsuspecting public,” Better Markets states.

The group also questions the SEC’s assertion that it is difficult to apply the Howey test to crypto assets. The courts have had no trouble applying Howey, it’s just that the outcome has nearly always been that crypto assets are securities. “The Commission does not like this result because it seems intent on taking positions that favor the crypto industry, and the crypto industry does not want the federal securities laws to apply to most crypto assets.”

Furthermore, all issuers want easier capital-raising with less disclosure. Biotechs, manufacturing, and private funds have all sought an easier way to sell securities to retail investors, but the proposed regulation arbitrarily singles out investment contracts that happen to involve a blockchain.

Better Markets says that the proposed exemptions, particularly the startup exemption, are inconsistent with investor protection. The fundraising exemption does a little better, requiring some financial information and audited financial statements, but it still enables principles-based disclosure, which gives executives discretion over what information they share and makes it hard for investors to compare information. Better Markets quotes the Shadow SEC’s observation that this “raises obvious questions as to whether covered investment contracts will be comparable.”

The safe harbor when managerial efforts have ceased is even worse than the above exemptions, according to the comment letter, in that it allows issuers to decide for themselves when the federal securities laws no longer apply. This invites confusion, erodes investor protection, and reduces disclosures exactly when investors most need information. “Crypto companies should be free to abandon their projects, but neither they nor the Commission should [] be free to abandon investors,” Better Markets says.

The group also argues that the proposal lacks a valid basis for preempting state law and that the SEC lacks authority to create a tailored offering regime that goes beyond the scope of its exemptive authority.

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