SEC Staff Says Token Buybacks Don't Make Crypto a Security—If the Network Works

In brief

• The SEC's Division of Corporation Finance said buyback announcements on functional crypto networks don't count as promises of "essential managerial efforts" under the Howey test.
• For networks that aren't yet functional, pitching buybacks as a source of yield or returns could still trigger securities laws.
• Attorney Gabriel Shapiro called the guidance a "loophole," but noted it's staff guidance without legal force that a future SEC could reverse.

Crypto projects looking to buy back their own tokens just got a green light from the SEC's staff, with one big condition.

In new FAQs published Friday, the agency's Division of Corporation Finance said that once a crypto system is functional, announcing a token buyback program doesn't amount to a promise of "essential managerial efforts." That's a key ingredient of the Howey test, the Supreme Court standard for deciding whether something is an investment contract, and therefore a security.

The picture changes for networks that aren't functional yet. There, staff said, a buyback announcement could cross the line if the issuer pitches it as generating yield or returns for holders.

The FAQs also said that after a network is functional, promises to maintain, upgrade or grow it wouldn't satisfy Howey. Promoting a system's current uses, or making vague aspirational statements that don't tout profit, likely wouldn't either.