SEC staff clarifies when crypto promises create an investment contract

Key points

• The nine FAQs were issued on 25 Sept by staff in the SEC's Division of Corporation Finance.
• Promises of work expected to generate profits remain central to whether an investment contract exists.
• Buyback announcements are assessed differently on functional and unfinished networks.
• Staking receipts for a digital commodity free of an investment contract are treated as a digital tool.
• The answers are staff views with no legal force and were neither approved nor disapproved by the Commission.

Promises made to token buyers can change how a crypto asset is treated under securities law, even when the asset itself is not a security, according to new staff guidance. In FAQs issued on 25 Sept, staff in the SEC's Division of Corporation Finance set out how marketing, network development, buybacks, staking receipts and trading platforms feed into the investment contract analysis. Bitcoin.com News reports that the answers are staff views and carry no legal force.

Under the existing framework, a non-security crypto asset can be offered as part of an investment contract when buyers reasonably expect profits from work the issuer promises to perform. The staff draws a line between describing what a network currently does and asking buyers to rely on promised work for returns. Promoting a network's present uses would likely not, on its own, promise essential managerial efforts, and broad plans for future features would not either if they do not promote potential profits.

The SEC's March interpretation says later token sales can also be securities transactions while that investment contract remains connected to the asset, meaning registration or an available exemption would be required. Whether promised functionality or decentralisation has been completed is judged against the issuer's own description to buyers, the staff says. If another party takes over the issuer's promised essential work, that transfer alone does not sever the token's link to the investment contract.

What issuers tell buyers

Once a network is functional, securing, maintaining and improving it do not amount to the essential managerial efforts discussed in the FAQs, according to the Commission view the staff cites. On a functional network with no central party, an issuer's statements would likely not create a new investment contract when nobody controls the system's success or failure. The FAQs also point to the treatment of functional networks in Regulation Crypto Assets, proposed on 18 Aug, which includes a conditional path for ending investment contract treatment after promised essential work is completed or permanently stopped. A later separation would not erase an earlier registration violation or liability for material misstatements, the March interpretation says.

The network's stage also shapes how staff views a buyback announcement. Repurchases announced for a functional system would not constitute a promise of essential managerial efforts. For an unfinished system, an announcement could constitute such a promise if the issuer presents the buyback as creating yield or return for token holders. The stated source of the holder's expected return is the distinction, and the FAQ does not settle the status of every buyback.

On staking, the staff addresses receipt tokens that record ownership of crypto committed to support a network. Under the circumstances in the SEC's interpretation, a receipt for a digital commodity free of an investment contract is a digital tool, while a receipt issued by a protocol-based liquid staking provider may instead be a digital commodity. A qualifying receipt adds no rights or financial benefits beyond those of the deposited asset, and its issuer cannot lend, pledge or otherwise use that asset. A receipt for a security, or for a non-security asset still subject to an investment contract, is a security under the March interpretation.

Functional networks and buybacks

The staff also says that operating a secondary market alone does not make a trading platform a promoter; it must meet the definition in Securities Act Rule 405. The Commission has neither approved nor disapproved the nine answers.

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