In brief
- The SEC’s Division of Corporation Finance has indicated that announcements regarding buybacks on operational crypto networks do not constitute promises of “essential managerial efforts” according to the Howey test.
- However, for networks that are not yet operational, promoting buybacks as a method to achieve yield or returns might still invoke securities regulations.
- Attorney Gabriel Shapiro has described this guidance as a “loophole,” but he also pointed out that it reflects staff guidance and lacks legal weight, which could potentially be reversed by a future SEC.
Recently, the SEC’s staff has provided a favorable outlook for crypto projects intending to buy back their tokens, albeit with an important stipulation.
In new FAQs released on Friday, the SEC’s Division of Corporation Finance stated that once a crypto network is operational, a token buyback announcement does not equate to a commitment to “essential managerial efforts.” This is significant because it pertains to the Howey test, which the Supreme Court uses to determine whether something is an investment contract — and consequently a security.
For networks that aren’t fully functional, the guidance suggests a buyback announcement could be problematic if it’s presented as a means of generating returns for investors.
Additionally, the FAQs clarify that after a network is operational, promises to sustain, enhance, or expand it will not satisfy the Howey criteria. Promoting the current functions of the system or making vague, aspirational statements that do not emphasize profit generally won’t qualify either.
Gabriel Shapiro, a corporate securities attorney at MetaLeX Labs and previously the general counsel at Delphi Labs, praised the guidance, indicating it represents considerable progress.
He stated on X that “the securities laws are beginning to appear opt-in, at least in how the SEC applies them to crypto.” Interestingly, he noted that the buyback provision exceeded his expectations.
In his interpretation, this allows teams to continue their development, support token prices through buybacks, while enjoying many advantages associated with public investments, all without granting holders traditional shareholder rights. He remarked that a “loophole” seems to have opened in a regulatory framework intended to prevent circumvention of actual economic realities.
Shapiro also suggested that the prevalent tendency in the crypto space is to enjoy the benefits of equity while sidestepping the associated obligations.
The FAQs build on the SEC’s interpretive release from March and its Regulation Crypto Assets proposal, which seeks to permit projects to issue tokens without complete registration. This update follows the agency’s new innovation exemption for tokenized stocks that arose after the Clarity Act stalled in the Senate.
SEC Chair Paul Atkins had previously hinted that the agency would intervene if the legislative efforts fell short, and a similar warning was issued by the CFTC in August.
While the crypto sector has generally welcomed regulatory guidance as a means to progress, it’s important to note that such rules are typically easier to rescind than actual laws. Shapiro echoed this sentiment, emphasizing that a private lawsuit or a different SEC could take a different approach in the future.
