Securities Regulation Daily Wrap Up, FEDERAL PREEMPTION—Academic leaders ask Congress to abandon efforts to redefine investment contracts in crypto bill, (Oct 9, 2025)
In a letter to Congress, the group emphasized that any crypto legislation should not take away states’ authority to fight securities fraud.
In a letter to Senate Banking Committee Chair Tim Scott (R-SC) and Ranking Member Elizabeth Warren (D-Mass.), 28 scholars voiced their opposition to provisions in the pending Responsible Financial Innovation Act, including the proposal to redefine the investment contract test. As it seeks to legislate around the offer and sale of digital assets, Congress should maintain the guardrails provided through state registration and licensing laws, and protect existing state anti-fraud authority, the group wrote.
The letter was forwarded to the Senate Banking Committee by NASAA, which recently wrote to the House Financial Services Committee to urge lawmakers to preserve states’ ability to police securities fraud, including in emerging distributed ledger technologies and AI.
Investment contract test. In their letter, the academic leaders asked Congress to remove Section 105 of the bill, which would redefine the investment contract test. They noted that federal and state securities regulators rely, sometimes exclusively, on the principle to act against new and emerging frauds.
They believe Section 105 will enable bad actors pushing pig butchering and Ponzi schemes, promissory note frauds, and other fraudulent offerings to exploit loopholes created by the section. In their view, those loopholes include new requirements that investors lose more than a minimum amount of money for a violation to exist, that the investment must be in an “enterprise or venture,” and that profit-making efforts of the scheme do not include “ministerial, technical, or administrative” activities.
The scholars also warned that the bill will hinder regulators’ efforts to address the constantly evolving nature of frauds, and courts will be faced with addressing time-sensitive requests for relief without the benefit of decades of case law. “Congress should not be pursuing policies that will make it easier for scam artists to get away with their crimes and harder for law enforcement and regulators to act,” the group wrote.
State safeguards. The scholars also urged Congress not to weaken the safeguards provided by state registration and licensing laws. In addition to setting professional conduct and knowledge standards, the state laws provide the investing public with access to important background information on securities professionals, the group stated.
Anti-fraud authority. Echoing NASAA’s view, the scholars asked that Congress not enact laws that weaken existing state anti-fraud authority. The academic leaders allowed that it is probably not Congress’s intention to interfere with the states’ ability to respond to fraud complaints, but said that the stakes are too high for Congress to leave any room for doubt. Congress should explicitly preserve state anti-fraud enforcement authority as it exists today, they wrote, to ensure that states remain an integral part of the U.S. response to online scams moving forward.
LegislativeActivity: Blockchain Enforcement FederalPreemption FraudManipulation NASAANews RiskManagement StateSecuritiesNews