The SEC has clarified its stance on crypto token buybacks, stating operational networks are not bound by managerial promises, while non-operational ones may face legal issues.
Summary
- The SEC clarified that buyback announcements from operational crypto networks do not imply promises of managerial efforts under the Howey test.
- For non-operational networks, marketing buybacks as a return source may breach securities laws.
- Attorney Gabriel Shapiro described the guidance as a "loophole," noting it is not legally binding and could change in the future.
The SEC has issued new guidance that could benefit cryptocurrency projects considering token buybacks, albeit with crucial conditions attached.
In a set of FAQs released recently, the SEC's Division of Corporation Finance specified that once a crypto network is operational, announcing a token buyback does not equate to a commitment to "essential managerial efforts," which is essential for the Howey test's investment contract definition.
However, this guidance changes for networks that are not yet operational. In these instances, the SEC cautioned that promoting a buyback as a method for generating returns could potentially violate securities regulations.
Additionally, the guidance stated that operational networks making promises about maintenance, upgrades, or expansions would not satisfy the Howey test requirements. Claims that promote current functionalities or make vague aspirational statements not focused on profit are also unlikely to meet regulatory standards.
Gabriel Shapiro, a corporate securities attorney at MetaLeX Labs, emphasized the significance of this guidance, remarking that it suggests securities laws may be becoming optional for crypto projects. He expressed surprise at the favorable nature of the buyback provisions and noted that this regulatory stance allows teams to advance their projects while supporting token values through buybacks, without granting token holders the rights typical of traditional shareholders. Shapiro stated, "They have created a loophole in a regulatory framework that was intended to prevent circumvention of economic realities."
He further highlighted a trend in the crypto space toward seeking the benefits of equity without the accompanying obligations associated with traditional ownership.
This guidance builds on the SEC's earlier interpretive release from March and its proposal for Regulation Crypto Assets, which would enable projects to issue tokens without complete registration. This follows the agency's recent exemption for tokenized stocks, which came after the Clarity Act's failure in the Senate.
In July, SEC Chair Paul Atkins indicated that the agency would take action if legislative efforts stalled, a sentiment echoed by the CFTC in August. The crypto industry has largely accepted the need for regulatory frameworks as a means to progress, though Shapiro cautioned that regulations are more easily reversed than laws, stating, "A private plaintiff or a future SEC could have different perspectives."
