U.S. SEC Staff Clarifies When Crypto Tokens May Fall Outside the Howey Test

U.S. SEC staff has issued new guidance addressing federal securities laws for certain crypto assets. The guidance covers staking receipt tokens, token buybacks, marketing statements, network development, and secondary-market platforms.

The FAQs come from the SEC’s Division of Corporation Finance and build on the Commission’s March 17 interpretive release. Staff stressed that the FAQs are not Commission rules and do not create new legal obligations.

The document focuses on when certain transactions do not meet elements used to identify an investment contract. It also explains when classification can change based on network structure.

Functional Networks Can Fall Outside the Howey Analysis

SEC staff said some activities on a functional crypto network would not constitute essential managerial efforts. Some of these activities include securing, maintaining, improving, or enhancing the system after it becomes functional.

The staff said promises to continue those services would not satisfy the Howey test under the stated circumstances. The position follows the Commission’s August proposal, Regulation Crypto Assets, which addressed investment contracts involving crypto assets.

The FAQs also addressed networks without a central party. Staff said issuer statements about such functional systems would likely not create a new investment contract. No person would control the system enough to determine its success or failure.

Staking Receipt Tokens Receive Clearer Classification

US SEC staff said a staking receipt token can qualify as a digital tool under certain conditions. That applies when the token represents a digital commodity not subject to an investment contract.

The receipt serves as evidence of the holder’s ownership of the deposited digital commodity. It does not provide added financial rights or transfer control of the deposited asset to the issuer.

A staking receipt token may instead qualify as a digital commodity when issued by a protocol-based liquid staking provider. In that case, its value must be linked to a functional crypto system and market supply and demand.

Crypto Buybacks and Marketing

Also, US SEC staff said token buybacks may be treated differently depending on whether a crypto network is already functional. A buyback involving a functional network would not, by itself, amount to essential managerial efforts.

The analysis can change when a network is not yet functional. A buyback could support an investment contract finding if promoted as creating yield or returns for token holders.

The FAQs also addressed how issuers market crypto projects. According to the report, promoting a network’s existing utility would generally not amount to a promise of essential managerial efforts.

Statements about possible future features may receive similar treatment when they do not promote expected profits. However, staff said each case depends on its specific facts and circumstances.

US SEC staff further said operating a secondary market does not automatically make a trading platform a promoter. The platform must still meet the definition under Securities Act Rule 405.

Under the Howey test, the analysis remains tied to network functionality, issuer promises, and expectations of profit from managerial efforts.

This article is for informational purposes only and does not constitute legal, financial or investment advice.