SEC staff says token buybacks do not make functional crypto networks securities

The SEC's Division of Corporation Finance said token buyback announcements do not amount to promises of essential managerial efforts after a crypto network becomes functional. The FAQs were published Friday. The Howey test helps determine whether an arrangement is an investment contract and therefore a security. For nonfunctional networks, staff said a buyback announcement could cross the line if the issuer presents it as generating yield or returns for holders. Staff said promises to maintain, upgrade or grow a functional network would not satisfy the Howey test. Staff said promoting a system's current uses would likely not satisfy the test. Staff also said vague aspirational statements that do not promote profit would likely not satisfy the test. The FAQs carry no legal force. A future SEC could reverse the guidance. Gabriel Shapiro, a corporate securities attorney at MetaLeX Labs and former general counsel at Delphi Labs, called the guidance a loophole. Shapiro said the guidance goes a long way. Shapiro wrote that the securities laws are starting to look opt-in when the SEC applies them to crypto. Shapiro said the buyback section went further than he expected. Shapiro argued that teams could build networks and support token prices through buybacks without giving holders shareholder-style rights. Shapiro said the guidance creates a loophole in a regulatory regime intended to prevent parties from drafting around economic reality. Shapiro argued that crypto's broader trend is to obtain the benefits of equity without its burdens. The FAQs build on the SEC's March interpretive release and its Regulation Crypto Assets proposal. The proposal would let projects sell tokens without full registration. The FAQs follow the SEC's new innovation exemption for tokenized stocks. The exemption was unveiled after the Clarity Act failed in the Senate. SEC Chair Paul Atkins had signaled in July that the agency would act if the bill failed. The CFTC issued a similar warning in August. Shapiro warned that a private plaintiff or a future SEC could reach a different conclusion.