New York Urges SEC to Withdraw Crypto Asset Proposal as California Challenges Rule 500
Key Facts
New York Attorney General Letitia James urged the U.S. Securities and Exchange Commission to withdraw its crypto asset regulation proposal in full, saying it exceeds the agency’s authority to grant exemptions and serves neither the public interest nor investor protection. New York submitted its objection on October 20, 2026, the same day the public comment period on the proposal also ended. On that day, California’s Department of Financial Protection and Innovation objected to proposed Rule 500 and the definition of “qualified purchaser.” The dispute centers on whether the proposed federal exemptions would reduce state requirements for registering and qualifying offerings. New York said in its letter: “The Commission should withdraw the proposal in full.”
New York says the proposed exemptions do not meet the requirement that they be necessary or appropriate in the public interest and consistent with investor protection. It says the proposal creates no market surveillance mechanism, even as it allows covered investment contracts to trade on platforms the agency does not oversee. Those platforms include, according to the state, decentralized finance protocols and foreign and U.S. centralized platforms. The state also objected to the absence of safeguards typically associated with broker registration, including investment limits and disclosure of financial information. New York says covered contracts can be sold immediately after acquisition, with no lockup period, increasing the importance of safeguards and oversight in its view.
The framework New York criticizes combines broad retail investor access, public marketing and the ability to transfer securities immediately, while excluding registered brokers, investment limits and financial statement disclosures, according to its letter. The state cites its securities law enforcement record to warn of the impact of absent registration, saying failure to register may be the first indication of fraud. It cited the case involving the Coinseed app and said it received more than 200 public complaints after requiring the app to register. New York said more than half of the crypto assets offered to the public between 2021 and 2025 failed, citing data it attributed to CoinGecko. The state uses these facts to support its argument that opening sales channels without traditional safeguards could expose investors to greater risks.
California, meanwhile, focuses its objection on proposed Rule 500, saying its definition of “qualified purchaser” could result in state requirements to register and qualify offerings being bypassed in some offerings and secondary transactions. The department says the definition does not specify characteristics that demonstrate an investor’s experience or ability to protect their interests, but instead treats anyone offered or sold a covered investment contract as qualified. The department wrote that “ordinary retail investors in digital asset offerings, which lack basic investor safeguards, are therefore treated as qualified.” It warned that the potential effect could deprive investors of state protections against offerings it considers unfair, arbitrary or fraudulent. It clarified that limiting its letter to Rule 500 does not mean it supports the rest of the proposal or is neutral toward it.
The proposal includes an exemption for offerings of up to $5 million over a four-year period, and another for offerings of up to $75 million during each 12-month period. It also includes a conditional safe harbor from the term “investment contract” within the definition of a security. The agency says the proposed framework provides pathways for certain crypto asset-related investment contracts, with principles-based disclosures, while keeping issuers subject to anti-fraud and anti-manipulation rules. New York, however, says these elements do not make up for the absence of market surveillance and the safeguards it considers necessary for investors. The dispute puts the scope of federal exemptions at the center of the conflict between the agency and the states over registration and oversight requirements.
The agency issued the proposal on August 18, 2026, and published it in the Federal Register on August 21, before closing public comments on October 20. New York says Congress negotiated, studied and debated crypto asset market structure legislation for nearly three years without enacting it. The state warned that the proposal cannot replace the CLARITY Act. The two states’ letters come during the comment period for a proposed rule, after the deadline for receiving feedback had passed. The facts in the letters do not represent a final agency decision on the proposal.