Summary
- The SEC's Division of Corporation Finance stated that buyback announcements from operational crypto networks do not constitute promises of "essential managerial efforts" as per the Howey test.
- For networks that are not yet operational, marketing buybacks as a source of returns could still violate securities laws.
- Attorney Gabriel Shapiro referred to this guidance as a "loophole," emphasizing that it is merely staff guidance and not legally binding, leaving room for future SEC changes.
The SEC staff has provided a favorable outlook for crypto projects planning to repurchase their tokens, albeit with a significant stipulation.
In new FAQs released on Friday, the agency's Division of Corporation Finance indicated that once a crypto network is operational, announcing a token buyback does not equate to a promise of "essential managerial efforts." This is crucial since it pertains to the Howey test, which the Supreme Court uses to determine if something qualifies as an investment contract, thus classifying it as a security.
However, the situation shifts for networks that are not yet functional. In those cases, staff warned that announcing a buyback could be problematic if it is presented as a means of generating yield or returns for token holders.
The FAQs further clarified that once a network is operational, assurances about maintaining, upgrading, or expanding the network would not fulfill the requirements of the Howey test. Additionally, promoting the current functionalities of a system or making vague aspirational claims that do not focus on profit would likely not meet the threshold either.
Gabriel Shapiro, a corporate securities lawyer at MetaLeX Labs and former general counsel at Delphi Labs, stated that this guidance represents a significant development.
He noted, "The securities laws appear to be becoming opt-in, at least as interpreted by the SEC in relation to crypto," adding that the buyback section exceeded his expectations.
Shapiro believes that this regulatory approach allows teams to continue developing their projects, support token prices through buybacks, and enjoy many advantages of public investments without granting token holders the rights associated with traditional shareholders. He remarked, "They have created a loophole in a regulatory framework that was intended to prevent circumvention of economic realities."
He also pointed out that the broader trend in crypto is not about tokenized ownership but rather the desire to gain the benefits of equity while avoiding its obligations.
The FAQs build upon the SEC's March interpretive release and its Regulation Crypto Assets proposal, which would allow projects to issue tokens without undergoing full registration. This guidance follows the agency's recent innovation exemption concerning tokenized stocks, introduced after the Clarity Act did not pass in the Senate.
In July, SEC Chair Paul Atkins had indicated that the agency would intervene if the bill stalled, a sentiment echoed by the CFTC in August.
The crypto sector has largely accepted regulatory oversight as a pathway forward, though regulations can be reversed more easily than laws. Shapiro reiterated this point, stating, "A private plaintiff or a future SEC could have different perspectives."