727 FinanceThe U.S. Securities and Exchange Commission released a crypto-asset FAQ to clarify the applicable boundaries of securities laws under the Howey test for functional networks, pledged certificate tokens, and repurchase plans, affecting token issuance and marketing.
Compiled | Odaily Planet Daily, Moni
This article comes from: Official website of the U.S. Securities and Exchange Commission
The Division of Corporate Finance of the U.S. Securities and Exchange Commission (SEC) released a FAQ on the application of federal securities laws to certain types of crypto-assets and related transactions, further responding to some unresolved issues in previous explanatory documents on crypto-assets. Although this FAQ is not a formal SEC rule or statement and does not have legal effect, its content further outlines the regulatory agency’s understanding of the boundary between “non-security cryptoassets” and “investment contracts.”
From functional networks, pledged certificate tokens, to token repurchases, marketing promotions, and whether the trading platform constitutes a "sponsor", this FAQ covers practical issues of long-term concern in multiple industries. One of the important threads is: when the encryption system has been functionalized, gradually reduced, or no central controller exists, the issuer and other participants continue to maintain, upgrade, promote network effects and other activities, under what circumstances it is no longer considered a "critical management effort" under the Howey test.
It should be noted that the FAQ does not discuss simply "which tokens are not securities", but further explains the relationship between crypto assets and investment contracts under specific circumstances, and what actions may not cause the relevant assets to continue to be subject to the investment contract framework. For the encryption industry, these details may affect the project team’s token issuance, marketing, network operations and repurchase arrangements, and also provide a new reference for understanding the regulatory boundaries of crypto-asset securities in the United States.
Questions about crypto asset classification
Question 1: The U.S. Securities and Exchange Commission has relevant definitions of “functional” and “decentralized.” However, regarding whether the issuer has fulfilled its statements or commitments to engage in key management efforts, the previous "Explanatory Announcement" stated: "...Whether the issuer has achieved functionalization should be judged based on how the issuer defines or otherwise describes functionalization, rather than based on what the market generally believes is functionalization"; and "...whether the issuer has achieved decentralization should be judged based on how the issuer defines or otherwise describes decentralization, rather than based on what the market generally believes is decentralization."
So, what is the relationship between the definitions of “functionalization” and “decentralization” in the Explanatory Notice and how issuers may define or otherwise describe “functionalization” and “decentralization” as part of their representations or commitments when promoting and marketing investment contracts?
These definitions are not relevant to judging whether an issuer fulfills its representations or promises, because each issuer will determine for itself the standards that must be met to achieve functionalization and/or decentralization with respect to its representations or promises.
Question 2: How to classify Staking Receipt Tokens?
If the pledge certificate token is a certificate issued for a digital commodity that is not subject to an investment contract, then the pledge certificate token itself is a digital instrument because it, as a certificate, has the actual function of proving that the holder owns the ownership of the relevant underlying digital commodity.
However, staking tokens may also be classified as digital commodities if they are issued by a protocol-based Liquid Staking Provider. In this case, the pledged certificate token is intrinsically linked to the programmed operating mechanism of a functionalized cryptographic system, and its value is derived from that operating mechanism and the relationship between supply and demand.
Question 3: Involves pledged certificate tokens and redeemable wrapped tokens (Redeemable Wrapped Tokens), and describes them as “receipts”. What is the difference between "certificates" and other financial instruments?
A "certificate" is an instrument that proves that a specific amount of assets has been deposited with the depository or custodian that issued the certificate, and also proves that the depositor has ownership of the assets.
The certificate will not change any original rights, obligations or interests of the deposited assets, nor will it provide the holder with any additional financial incentives or benefits.
Certificates differ from other financial instruments in that they do not transfer ownership or control of the deposited assets to the issuer of the certificate. Therefore, the issuer may not transfer, lend, pledge, re-pledge or otherwise use the deposited assets for any reason, nor may the issuer subject the assets to claims by third parties.
Issues related to crypto-assets subject to investment contracts
Question 4: The previous Interpretative Announcement stated: “…the statements or undertakings are more likely to create a reasonable expectation of profits when they relate clearly and unambiguously to key management efforts that the issuer will engage in, contain sufficient detail to demonstrate the issuer’s ability to implement the proposed project, and explain how the issuer’s efforts will produce profits that the purchaser reasonably expects.” So, under what circumstances does promotional and marketing information constitute a representation or commitment to engage in key management efforts?
Whether promotional and marketing messages constitute representations or promises to engage in critical management efforts depends on the specific facts and circumstances.
However, merely advertising the current usefulness and capabilities of an encryption system may not constitute a representation or commitment to engage in critical management efforts unless other factors are present. Likewise, if the relevant promotion does not promote potential profits, merely promoting the future usefulness, functions and capabilities of the encryption system through uncertain visionary statements may not constitute a statement or commitment to engage in key management efforts, unless other factors are involved.
Question 5: The previous Interpretative Announcement covered certain situations: a non-security crypto-asset was initially issued and sold within the framework of an investment contract, but if the purchaser no longer reasonably expects the issuer to perform or continue to engage in key management efforts as represented or promised by it, then the non-security crypto-asset will no longer be subject to the investment contract.
If the issuer's representations or promises are taken over by another party, whether voluntarily or legally, will the non-security crypto-assets be separated from the relevant investment contract and no longer bound by it?
Won't. The non-security crypto-asset will not be severed from the underlying investment contract if another party assumes a representation or commitment to engage in key management efforts by the issuer, whether such undertaking is voluntary or occurs by law.
Question 6: Software and networks are usually in a state of continuous development because they require constant maintenance and upgrades. Additionally, a functional crypto system may need to grow through network effects. After a cryptographic system is functionalized, what activities can issuers and other market participants conduct with respect to the cryptographic system that would not constitute critical management efforts?
The U.S. Securities and Exchange Commission has recently stated that once a cryptographic system is functionalized, activities that provide security, maintenance, improvement, or enhancement services to that system or its functionality, or that promote network effects—whether by initiating or funding development projects, or other similar activities—do not involve critical management efforts.
Therefore, any representation or promise made by an issuer to provide or continue to provide (or cause others to provide) such services after the encryption system has been functionalized will not satisfy the Howey test. (See Regulation Crypto Assets, Publication No. 33-11434 (August 18, 2026), page 56 [91 FR 54510, 54525 (August 21, 2026)])
Question 7: If a functional encryption system does not have a subject that can centrally control, manage or substantially affect the operation and success of the encryption system, is it possible that the relevant statements made by the issuer will form a new investment contract, making the native encryption assets subject to the investment contract?
If a functional encryption system does not have a subject that can centrally control, manage or substantially affect the operation and success of the encryption system, the issuer is usually unlikely to form a new investment contract, because neither the issuer nor anyone else can control the functional encryption system and cannot take any action that will affect the success or failure of the encryption system.
Question 8: Issuers of non-security cryptoassets may conduct buyback programs for a variety of reasons, including fund management, supply reduction, protocol fund-backed destruction, and rebalancing. When the issuer announces the implementation of a non-security crypto-asset repurchase plan, is it equivalent to a promise to investors that "I will make this project/token generate income through my own management and operating behaviors"?
If the encryption system has been functionalized, the issuer's announcement of a non-security crypto asset buyback plan will not be equivalent to a promise to investors that "I will make this project/token generate income through my own management and operating behaviors."
However, if the crypto system has not yet been functionalized and the issuer describes the buyback as being able to create revenue or returns for token holders, the buyback announcement may be equivalent to a promise to investors that "I will make this project/token generate revenue through my management and operating actions."
Question 9: The previous Interpretative Announcement stated that “issuer” includes “related parties and agents of the issuer or promoter”. So, will a trading platform that provides a secondary market for crypto assets be considered a promoter when determining whether there is an investment contract issuance?
A trading platform that provides a secondary market for crypto-assets will be deemed a promoter only if it meets the definition of a “promoter” in Securities Act Rule 405.