On October 20, New York Attorney General Letitia James and the California DFPI separately submitted comment letters opposing the SEC’s proposed Regulation Crypto Assets (previously covered by InfoBytes here).

The New York attorney general’s letter urged the SEC to withdraw the proposal in its entirety. It argued that the proposal exceeds the SEC’s exemptive authority under Section 28 of the Securities Act and Section 36 of the Exchange Act because it is not “necessary or appropriate in the public interest” or “consistent with the protection of investors.” The letter also maintained that Congress had not specifically authorized the proposal, which it said cannot replace the now-stalled CLARITY Act (previously covered in this Orrick Insight here). Among its other objections, the letter contended that: (i) the proposal provides no mechanism for market surveillance; (ii) the $5 million startup exemption, which the letter said may be available to non-U.S. issuers, requires no financial statements, investment limits, registered intermediaries, or EDGAR filings; (iii) the issuer self-certification process under the investment contract safe harbor departs from Howey and takes effect on filing, with no review by the SEC; and (iv) preempting state registration would remove a key enforcement tool, because the failure to register “can be the first indicator of fraud.”

Separately, on October 21, the California DFPI announced its letter, asserting that the rule would add a new “qualified purchaser” definition under Section 18(b)(3) of the Securities Act and preempt state registration and qualification requirements for offerings under the proposal’s exemptions and for certain secondary-market transactions. The DFPI indicates that preempting these requirements would harm investors by depriving them of critical protections against potentially unfair, abusive, and fraudulent securities offerings. The agency also argued that the definition exceeds the SEC’s authority because it contains no element of investor sophistication, which the DFPI said conflicts with the plain meaning of the term and the legislative history of the National Securities Markets Improvement Act of 1996. Further, the DFPI highlighted that keeping only antifraud authority would not be enough to replace California’s merit review. The agency, which warned that the proposal’s reasoning has “no natural limit,” urged the SEC to withdraw Proposed Rule 500 as exceeding its authority.