- The SEC’s Division of Corporation Finance issued nine crypto FAQs on 25 September, building on the interpretive release the SEC and CFTC put out on 17 March.
- A buyback announcement on a functional network is not a promise of managerial effort, but it could be one on a network that is not yet functional if pitched as yield or return.
- Staff said the answers are their own views, and the Commission has neither approved nor disapproved them.
US Securities and Exchange Commission (SEC) staff said on Friday that a token buyback does not, on its own, turn a crypto asset into a security when its network already works.
That answer is one of nine in a set of frequently asked questions the SEC’s Division of Corporation Finance issued on 25 September. The questions build on the March interpretive release in which the SEC and CFTC named Bitcoin, Ether, Solana and XRP as digital commodities.
Staff stated that the answers are their own views, not a rule or a statement of the Commission. The Commission has neither approved nor disapproved them.
Like all staff guidance, these FAQs have no legal force or effect, do not alter or amend applicable law, and do not create any new or additional obligations for any person.
SEC’s Division of Corporation Finance
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Buybacks Depend on a Working Network
Under the Howey test, an asset is part of an investment contract when buyers expect profits from the essential managerial efforts of others. Staff applied that test to buybacks run for treasury management, supply reduction, protocol-funded burns and rebalancing.
On a network that is not yet functional, staff said, a buyback pitched as yield or return for holders could count as a promise of those efforts. Once a crypto system is functional, services that secure, maintain, improve or enhance it are not essential managerial efforts either. The same applies to sponsoring or funding development projects that help the network grow.
An issuer’s promise to keep providing those services therefore would not satisfy the Howey test. Staff drew that view from the Regulation Crypto Assets proposal the SEC released in August.
Staff said marketing claims depend on the facts. In their view, promoting a network’s current uses likely would not, without more, count as a promise of managerial effort. The same holds for loose statements about possible future features that say nothing about profit.
Staking Receipts and Trading Platforms
A staking receipt token for a digital commodity that is not tied to an investment contract is itself a digital tool, staff said. It may count as a digital commodity when a protocol-based liquid staking provider issues it.
Once a functional network has no central party, statements by its issuer likely would not create a new investment contract, according to the FAQ. A token stays tied to its original contract, however, when a third party takes over the issuer’s promises.
Trading platforms that run a secondary market for a token count as its promoter only if they meet the definition in Securities Act Rule 405.
Read more: CFTC Chair Signals Major U.S. Financial Market Shift as Tokenisation Accelerates
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