SEC Opens Loophole, Crypto Projects Check It Twice 🎄

The Securities and Exchange Commission's Division of Corporation Finance told crypto issuers Friday that announcing token buybacks on a functioning network does not, on its own, amount to a promise of "essential managerial efforts" under the Howey test. In new FAQs, staff wrote that the picture changes for networks that are not yet functional, where a buyback announcement could cross the line if the issuer pitches it as generating yield or returns for holders.

Once a network is functional, the staff added, promises to maintain, upgrade or grow it would not satisfy Howey. Promoting a system's current uses, or making vague aspirational statements that do not tout profit, likely would not either. The Howey test is the Supreme Court standard for determining whether an asset is an investment contract and therefore a security.

Gabriel Shapiro, a corporate securities attorney at MetaLeX Labs and former general counsel at Delphi Labs, said the guidance goes further than he expected. "The securities laws are starting to look opt-in now, at least as applied by the SEC to crypto," he wrote on X. The buyback section, he added, "goes further than I expected." In his reading, teams can keep building, prop up prices with buybacks and enjoy many perks of a public investment without giving holders shareholder-style rights. "They have opened a loophole in a regulatory regime whose whole point was supposed to be that you couldn't draft your way around economic reality," he wrote.

The FAQs, which carry no legal force, build on the SEC's March interpretive release and its Regulation Crypto Assets proposal, which would let projects sell tokens without full registration. They also follow the agency's new innovation exemption for tokenized stocks, unveiled after the Clarity Act failed in a 49-50 procedural vote in the Senate last week. SEC Chair Paul Atkins had signaled in July that the agency would step in if the bill faltered, and the Commodity Futures Trading Commission issued a similar warning in August. Shapiro noted the limits of that approach, writing that "a private plaintiff or a future SEC could have other ideas," underscoring that agency rules remain easier to unwind than statutes.