SEC Says Crypto Buybacks and Network Upgrades Do Not Automatically Make Tokens Securities

In Brief:

• SEC guidance says token buybacks on functioning networks do not automatically create investment contracts, while promised returns can change assessments.
• Network maintenance, upgrades, and descriptions of existing uses generally differ from promotions that encourage buyers to expect profits from developers.
• CFTC guidance addresses tokenized customer fund investments and blockchain recordkeeping, while preserving investment, custody and record access requirements for firms.

The U.S. Securities and Exchange Commission says token buybacks, network upgrades and marketing claims do not automatically make crypto assets securities. Its updated guidance distinguishes routine activity on functioning networks from promises that encourage buyers to expect investment returns.

According to the SEC’s Division of Corporation Finance, announcing a buyback for a token on an operating network does not alone create an investment contract. The circumstances change when a network remains unfinished, and promoters present buybacks as a potential source of returns.

That distinction gives projects a clearer way to assess their announcements, while preserving the SEC’s ability to examine individual cases. A buyback’s purpose and the claims surrounding it matter more than the announcement alone.

The guidance also addresses projects that develop their networks following launch. Developers may secure systems, maintain services and improve features without automatically creating the managerial reliance examined under the Howey test.

Moreover, efforts to encourage use of an operating network do not necessarily create that reliance. The SEC’s explanation recognizes that functioning networks still require maintenance and improvements.

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SEC Draws Line Between Describing Network Features and Promising Token Profits

Marketing a network’s existing uses generally does not lead purchasers to expect profits from a project team’s managerial work. Projects may also discuss planned features, provided their statements do not promote those features as opportunities for profit.

However, the agency did not give every token promotion or development plan the same treatment. Its assessment still depends on the network’s condition, the project’s statements, and what purchasers reasonably expect.

Consequently, a project cannot settle a token’s legal status simply by calling its work an upgrade or its purchases a buyback. The SEC will consider the circumstances surrounding those activities under existing securities law.

The FAQ builds on the SEC’s March interpretation addressing how federal securities laws apply to certain crypto assets and transactions. That interpretation provides the broader framework for the division’s answers about buybacks, ongoing development and promotional statements.

The update follows the Clarity Act’s failure to advance in the Senate. Meanwhile, regulators are addressing industry questions through guidance under their existing authority.

Separately, Commodity Futures Trading Commission staff updated its guidance for regulated firms handling customer funds and maintaining records. The CFTC addressed investments in tokenized versions of permitted assets and the use of blockchains for recordkeeping.

Firms must still satisfy applicable investment and custody requirements when they use tokenized assets. Additionally, firms using blockchains for records must produce those records even when a network or block explorer stops working.

The SEC’s guidance leaves the central question tied to each project’s conduct and claims. Buybacks and upgrades alone do not decide whether purchasers expect profits from a team’s efforts.

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