- SEC staff added a no-central-party condition to guidance on buybacks involving functional non-security crypto assets.
- Buybacks for nonfunctional systems may raise investment contract issues when presented as generating yield or returns for token holders.
- The FAQ also addresses staking receipts and promotions, but its interpretations are nonbinding and carry no legal force.
The U.S. Securities and Exchange Commission has revised its crypto guidance, clarifying when token buyback announcements may fall outside investment contract rules. Updated September 28, the staff FAQ states that buybacks involving functional crypto systems without a central party generally do not constitute promises of managerial efforts. The change follows concerns raised by a16z crypto General Counsel Miles Jennings.
SEC Adds Central Party Condition to Buyback Guidance
The SEC’s Division of Corporation Finance updated Question 2.5 in its crypto FAQ to include the condition that a functional system has no central party. Under this guidance, an issuer’s buyback announcement for a non-security crypto asset would not constitute a promise of essential managerial efforts.
However, if a crypto system is not functional, announcing a buyback could create such a promise. This applies when the issuer presents the program as generating yield or returns for token holders.
The revision followed comments from Miles Jennings, a16z crypto’s general counsel and head of policy. Jennings previously warned that the earlier wording could allow issuers to announce buybacks without creating an investment contract.
FAQ Explains Other Crypto Classification Conditions
The updated FAQ also addresses promotional statements, staking receipt tokens and decentralized systems. The staff said promoting a system’s current utility or potential features generally would not constitute promises of managerial efforts without additional commitments.
Once a system becomes functional, services involving maintenance, upgrades, security and network growth generally would not meet the Howey test. However, transferring an issuer’s commitments to another party does not end an associated investment contract.
The SEC staff also explained that staking receipt tokens may qualify as digital tools or digital commodities, depending on their structure. Receipts must evidence ownership without giving issuers control to lend, pledge or otherwise use deposited assets.
Guidance Remains Nonbinding Staff Interpretation
The FAQ states that its answers represent Corporation Finance staff views, not formal SEC rules or regulations. The Commission has neither approved nor disapproved the content, which carries no legal force and does not change existing law.
The document also says a trading platform is considered a promoter only if it meets the definition under Securities Act Rule 405.