U.S. crypto startups are pushing the Securities and Exchange Commission to overhaul a draft regulation they claim is riddled with legal traps. These companies argue that current ambiguities regarding token classification are forcing domestic innovators to relocate offshore.
The Howey Test and the Exodus of American Web3 Firms
The application of the 1946 Howey test to digital assets has created a climate of uncertainty for U.S. developers. According to the report, many American Web3 companies have already chosen to block U.S. users or move their operations entirely offshore to avoid the risks associated with this aging legal standard. This trend suggests a growing gap between technological advancement and the regulatory frameworks intended to oversee it.
The industry is particularly concerned about retroactive litigation.. The draft regulation currently requires teams to acknowledge if a token was "management-dependent" during its development, which startups argue exposes them to lawsuits for actions taken years ago. To counter this , policy centers are advocating for the right to formally declare that specific tokens never met the legal definition of a security.
Why Airdrops and KYC are Not Investment Contracts
A central point of contention involves how the Securities and Exchange Commission classifies user interaction. The startup community argues that activities such as completing a Know Your Customer (KYC) process, connecting a digital wallet, or receiving an airdrop should be viewed as user engagement rather than an investmet in a security.
As the source reports, the industry believes that free token distributions for on-chain participation do not constitute an investment contract. If the SEC continues to treat these engagement tools as securities offerings, it could effectively criminalize the primary methods Web3 projects use to build community and distribute governance.
The Struggle to Navigate 50 Different State Jurisdictions
The proposed "Safe Harbor" provision in the SEC draft is viewed by many as insufficient because the protection expires once a project exits the program. Industry advocates are calling for an indefinite exemption, arguing that requiring a single project to comply with the varying laws of more than 50 different jurisdictions is an impossible administrative burden.
Legal representatives for Hyperliquid have specifically highlighted the lack of clarity regarding on-chain data. They warn that without precise guidelines, early-stage projects may be forced into non-compliance or face premature penalties simply because the rules of the road are not clearly marked.
The House Oversight Committee's September Probe into Insider Trading
Beyond the draft regulations, the crypto sector is facing targeted political pressure. In September, the House Oversight Committee requested internal data from a platform co-founder as part of an investigation into potential insider trading linked to tariff announcements.
While the report notes that no formal lawsuits or fines have been filed by the SEC or the Commodity Futures Trading Commission (CFTC) against the platform in question, the pressure is mounting. The platform is also facing scrutiny from traditional financial institutions, including the Chicago Mercantile Exchange, illustrating a pincer movement of regulatory and institutional opposition.
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