The SEC has released a crypto asset regulatory FAQ, detailing whether functional networks, staking receipt tokens, and token buybacks constitute securities, providing key reference for crypto project compliance.
Editor's note: The Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) has released a crypto asset regulatory FAQ, focusing on issues such as functional networks, staking receipt tokens, token buybacks, and marketing and promotion, providing further reference for understanding the circumstances under which crypto assets may not be subject to the investment contract framework.
The Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) has released an FAQ on the application of federal securities laws to certain types of crypto assets and related transactions, further responding to some issues that remained unclear in its earlier crypto asset interpretive release. Although this FAQ is not a formal SEC rule or statement and has no legal force, its content further outlines the regulator's understanding of the boundary between "non-security crypto assets" and "investment contracts."
From functional networks and staking receipt tokens to token buybacks, marketing and promotion, and whether trading platforms constitute "promoters," this FAQ covers multiple practical issues that the industry has long been concerned about. One of its key threads is: once a crypto system has become functional and central controlling parties have gradually diminished or ceased to exist, under what circumstances do the issuer's and other participants' continued activities—such as maintenance, upgrades, and promoting network effects—no longer constitute "essential managerial efforts" under the Howey test.
It should be noted that what the FAQ discusses is not simply "which tokens are not securities," but rather a further explanation of the relationship between crypto assets and investment contracts under specific circumstances, and which activities may not cause the relevant assets to remain subject to the investment contract framework. For the crypto industry, these details may affect project parties' token issuance, marketing, network operations, and buyback arrangements, and also provide new reference for understanding the boundaries of U.S. crypto asset securities regulation.
Question 1: The SEC has provided relevant definitions of "functional" and "decentralized." However, regarding whether an issuer has fulfilled the statements or commitments it made to undertake essential managerial efforts, the earlier Interpretive Release stated: "...whether an issuer has achieved functionality should be judged based on how the issuer defines or otherwise describes functionality, rather than on what the market generally considers functionality to be"; and "...whether an issuer has achieved decentralization should be judged based on how the issuer defines or otherwise describes decentralization, rather than on what the market generally considers decentralization to be."
What, then, is the relationship between the definitions of "functional" and "decentralized" in the Interpretive Release and the issuer's defining or otherwise describing "functional" and "decentralized" as part of its statements or commitments when promoting and marketing an investment contract?
These definitions are irrelevant to determining whether an issuer has fulfilled its statements or commitments, because with respect to its statements or commitments, each issuer determines for itself the standards that must be met to achieve functionality and/or decentralization.
Question 2: How are staking receipt tokens classified?
If a staking receipt token is a receipt issued in respect of a digital commodity that is not subject to an investment contract, then the staking receipt token itself is a digital instrument, because as a receipt it has the practical function of evidencing that the holder owns the relevant underlying digital commodity.
However, if a staking receipt token is issued by a protocol-based liquid staking provider, it may also be classified as a digital commodity. In this case, the staking receipt token is intrinsically linked to the programmatic operation of a crypto system that has achieved functionality, and its value derives from that operation as well as from supply and demand.
Question 3: This involves staking receipt tokens and redeemable wrapped tokens, which are described as "receipts." How do "receipts" differ from other financial instruments?
A "receipt" is an instrument that evidences that a specified quantity of assets has been deposited with the depositary or custodian that issued the receipt, and that the depositor has ownership of those assets.
A receipt does not alter any of the original rights, obligations, or interests in the deposited assets, nor does it provide the holder with any additional financial incentive or benefit.
The difference between a receipt and other financial instruments is that it does not transfer ownership or control of the deposited assets to the issuer of the receipt. Accordingly, the issuer may not, for any reason, transfer, lend, pledge, re-pledge, or otherwise use the deposited assets, nor may it subject those assets to the claims of third parties.
Question 4: The earlier Interpretive Release stated: "...when the relevant statements or commitments clearly and unambiguously relate to essential managerial efforts that the issuer will undertake, contain sufficient detail to demonstrate the issuer's ability to implement the proposed project, and explain how the issuer's efforts will generate the profits that purchasers reasonably expect, such statements or commitments are more likely to form a reasonable expectation of profits." Under what circumstances, then, will promotional and marketing information constitute statements or commitments to undertake essential managerial efforts?
Whether promotional and marketing information constitutes statements or commitments to undertake essential managerial efforts depends on the specific facts and circumstances.
However, merely promoting the current utility and functionality of a crypto system likely will not constitute statements or commitments to undertake essential managerial efforts, unless there are other factors. Likewise, if the relevant promotional activities do not promote potential profits and merely promote the future utility, functionality, and capabilities that a crypto system may possess through uncertain, aspirational statements, they likely will not constitute statements or commitments to undertake essential managerial efforts, unless there are other factors.
Question 5: The earlier Interpretive Release addressed certain circumstances: a non-security crypto asset was initially issued and sold under an investment contract framework, but if purchasers no longer reasonably expect that the issuer can perform or continue to perform the essential managerial efforts stated or committed to, then the non-security crypto asset will no longer be subject to the investment contract.
If the issuer's statements or commitments are taken over by another party, whether voluntarily or by operation of law, will the non-security crypto asset be separated from the relevant investment contract and no longer subject to it?
No. If another party takes over the issuer's statements or commitments to undertake essential managerial efforts, whether such assumption occurs voluntarily or by operation of law, the non-security crypto asset will not thereby be separated from the relevant investment contract.
Question 6: Software and networks are generally in a state of continuous development, as they require ongoing maintenance and upgrades. In addition, a functional crypto system may need to grow through network effects. After a crypto system has achieved functionality, what activities may the issuer and other market participants undertake with respect to the crypto system that will not constitute essential managerial efforts?
The SEC has recently stated that, once a crypto system has achieved functionality, providing security, maintenance, improvement, or enhancem