SEC Staff Says Token Buybacks Usually Don’t Make a Token a Security if the Network Is Already Functional

The U.S. Securities and Exchange Commission’s Division of Corporation Finance said in new FAQs released Friday that a crypto project’s token buyback program usually does not amount to a promise of “essential managerial efforts” once the underlying network is already functional. That matters because the concept is one of the elements in the Howey test, the Supreme Court framework used to determine whether an arrangement qualifies as an investment contract and therefore a security. The staff drew a line between live, usable networks and projects that are not yet operational, warning that buybacks on non-functional networks could raise securities concerns if issuers market them as a source of yield or returns. The FAQs also say that, after a network is functional, commitments to maintain, upgrade, or grow it generally would not satisfy Howey, and neither would promoting current uses of the system or making vague aspirational statements that do not tout profits. Securities lawyer Gabriel Shapiro said the guidance went further than he expected, though he also warned that the FAQs carry no legal force and could be viewed differently by private plaintiffs or a future SEC.