- SEC staff said functional crypto networks can receive ongoing development and maintenance services without necessarily creating new investment contracts.
- Staking receipt tokens may qualify as digital commodities when they represent deposited assets without altering their rights or benefits.
- Token buybacks and promotional statements face different treatment depending on network functionality and whether returns are emphasized.
SEC staff issued new FAQs Sept. 25 explaining how the agency’s March digital asset guidance applies to crypto assets. The document addresses token functionality, staking receipt tokens, investment contracts, buybacks and promotional statements. The staff emphasized that the FAQs reflect its views and carry no legal force or effect.
SEC Explains When Crypto Networks Become Functional
The FAQs address how issuers can define functionality and decentralization through their representations. Those issuer-defined thresholds determine whether promised milestones have been fulfilled.
However, the SEC staff said functional networks can continue receiving certain services without creating essential managerial efforts. Those services include securing, maintaining, improving and enhancing network functionality.
The guidance also covers activities supporting network effects. Funding development projects or similar activities would not constitute essential managerial efforts after functionality is achieved.
Notably, statements about a functional network without a central party would likely not create a new investment contract. The staff cited the absence of centralized control over the network.
Staking Receipt Tokens Get Specific Treatment
The FAQs also explain how staking receipt tokens fit within the March interpretive framework. A receipt for a digital commodity can qualify as a digital tool under certain circumstances.
However, a staking receipt token may qualify as a digital commodity when issued by a protocol-based liquid staking provider. Its value can derive from a functional crypto system’s programmatic operation and market supply.
The staff also explained what makes an instrument a receipt. It must evidence ownership of deposited assets without changing their rights or benefits.
The receipt issuer cannot transfer, lend, pledge, rehypothecate or otherwise use the deposited asset. Third parties also cannot claim the deposited asset through the receipt structure.
Buybacks And Promotions Face Different Tests
Promoting a crypto system’s current utility would generally not constitute an essential managerial promise without additional factors. Indefinite statements about potential features also would not qualify without profit-related promotion.
The staff separately addressed token buybacks. For functional networks, buyback announcements would not constitute promises of essential managerial efforts.
However, buybacks involving nonfunctional systems could qualify when issuers present them as creating yield or returns. Secondary trading platforms would only qualify as promoters when they meet Securities Act Rule 405’s definition.
