Key Insights:
- Staking receipts need to make sure that the original ownership rights are kept safe and that no extra financial benefits are added.
- Functional networks can help worries about investment contracts when it comes to keeping things running and buying back tokens.
- Promises, about making money and networks that are not completed are still very important when looking at whether something is a security.
SEC crypto guidance issued on September 25 clarifies how staking receipts, token buybacks and functional blockchain networks may fall outside U.S. securities laws. The Securities and Exchange Commission’s Division of Corporation Finance addressed investment contracts, giving crypto projects further direction under existing federal securities law.
The new FAQs explain how staff evaluates digital assets and issuer activities under the Howey test. However, the answers represent staff interpretations rather than binding Commission decisions. They create no new legal obligations or changes to existing securities laws.
SEC Crypto Guidance Defines Staking Receipt Conditions
The SEC staff explained when a stake received tokens can be considered a digital tool, as opposed to a security. The tokens are usually proof of ownership of underlying digital commodities backed up by a staking process.
In the guidance, a receipt of the guidance ought to maintain the rights of the holder of the underlying asset. It’s not capable of adding extra financial incentive or setting up their own staking rewards.
The provider also does not have the right to use the money deposited with them as its own. In particular, the provider is not allowed to loan, pledge, transfer or use them for another purpose.
In addition, the underlying assets should not be subject to claim by the provider’s creditors. The conditions are there to differentiate ownership receipts from those involving extra financial promises.
Staff also spoke with liquid staking providers based on blockchain protocols. If their value is based on the results of their network operations and market demand and supply, the tokens might qualify as digital commodities.
Functional networks change the investment contract analysis
The September 25 FAQs also explain when previously established investment contracts may no longer involve essential managerial efforts. The analysis centers on promises an issuer made when selling digital assets.
Under the Howey test, an investment contract can involve expected profits derived from another party’s managerial efforts. However, staff said ongoing technical work does not automatically satisfy that requirement.
Once a crypto network becomes functional, developers may continue providing security improvements, software upgrades and development funding. They may also support network growth without necessarily performing essential managerial work.
The distinction depends on the issuer’s original promises and the network’s actual condition. Staff said functionality must reflect the commitments made to buyers.
Consequently, an issuer cannot assume that every development activity ends investment contract concerns. If another party assumes responsibility for promised essential managerial work, the investment contract does not automatically disappear.
Meanwhile, a functional decentralized network presents a different situation. When no central party controls its success or failure, statements from the original issuer may be less likely to create another investment contract.
The guidance emphasizes the need to look at individual promises, not just all token and development activities as equal.
There are different rules for token buybacks and token promotions
The SEC staff also provided guidance on how token buybacks could impact securities assessments. In a buyback, project purchases the project’s own tokens in the market.
A buyback announcement alone is not necessarily evidence of key management actions for a working network. Just because the buyers announce it does not mean that they think that they will gain any profits from the work of the issuer.
Assessment of unfinished networks is another matter, though. If a project encourages buybacks either as a source of yield or financial return, it may create investment contract issues. The difference focuses on the service the network can provide and the representations made to the buyers by the issuer.
There is also a fact specific analysis of statements of marketing. The staff observed that a description of the current uses of the tokens is often different from the promise of profit from issuer actions in the future.
Future statements of intent on potential features might be treated differently if they do not reference development plans with financial returns. However, promotional claims tied directly to expected investor profits could affect the analysis.
Trading platforms also do not automatically become crypto promoters by listing tokens. Staff said platforms must meet the existing Securities Act Rule 405 definition of a promoter.
Regulatory implications for crypto projects
The latest guidance provides additional detail following the SEC’s March interpretation of federal securities laws. That framework distinguished digital assets from investment contracts associated with their sale.
The September FAQs address practical questions involving staking receipts, network functionality, issuer promises and promotional activities. They also clarify how staff approaches redeemable wrapped tokens under the existing interpretation.
However, the guidance does not ensure that specific tokens or crypto businesses can qualify for exemptions. Every arrangement involves a consideration of its structure, rights, operations and public representation.
The distinction between staff guidance and formal Commission action also remains important. The SEC has neither approved nor rejected the FAQ responses, and they carry no independent legal force.
