SEC Staff Says Token Buybacks and Network Development May Not Trigger Howey Test

SEC staff guidance says token buybacks and continued development of functional crypto networks

Staff at the U.S. Securities and Exchange Commission (SEC) said token buybacks and continued development of functional crypto networks generally may not amount to the “essential managerial efforts” required to satisfy part of the Howey test, according to an X post from Wu Blockchain.

The SEC’s Division of Corporation Finance issued new frequently asked questions (FAQs) clarifying aspects of the agency’s March 17 guidance on the application of federal securities laws to crypto assets. The guidance distinguishes between activities involving networks that are already functional and those promoted before a system has reached functionality.

SEC Clarifies Treatment of Functional Crypto Networks

According to the FAQs, maintaining, improving and developing an already functional crypto network generally would not constitute the type of essential managerial effort relevant to the Howey analysis. The same applies to non-security token buybacks when they are conducted after the underlying system has become functional.

The distinction is important because the Howey test examines whether purchasers have a reasonable expectation of profits derived from the efforts of others. The SEC’s March 17 interpretation established a framework for determining when crypto assets and related transactions fall within federal securities laws.

The SEC has also explained that activities undertaken after a crypto network becomes functional may differ from the development efforts that purchasers depend on to make an incomplete system operational. Its current guidance states that services to secure, maintain, improve or enhance a functional network generally would not constitute essential managerial efforts.

Token Buybacks Face a Different Analysis Before Functionality

The FAQs draw a separate line around token buybacks promoted before a crypto system becomes functional.

According to Wu Blockchain’s summary of the SEC staff guidance, a buyback could constitute an essential managerial effort when it is promoted as a mechanism for generating returns before the network has become functional. The way a buyback is communicated and the stage of development of the underlying system therefore remain relevant to the analysis.

The SEC’s broader framework has previously identified actions intended to support the market price of a digital asset, including buybacks and supply-related measures, as factors that can be relevant when evaluating reliance on the efforts of others.

Staking Receipt Tokens Also Addressed

The new FAQs also address Staking Receipt Tokens, which staff said may qualify as “digital tools” or “digital commodities” depending on their structure.

The classification reflects the SEC’s broader crypto asset framework, which established categories including digital commodities, digital collectibles, digital tools, stablecoins and digital securities. The March 17 interpretation also addressed how certain non-security crypto assets may become subject to, or cease to be subject to, an investment contract.

The SEC staff emphasized that the FAQs represent staff views and do not have legal force or effect. They therefore do not create new legal obligations or independently alter existing law. A separate SEC statement issued by the Division of Corporation Finance in March likewise notes that staff statements do not amend applicable law or create new obligations.

Writer: Victoria Hale
Technology & Blockchain Writer

Victoria Hale writes about blockchain technology, digital infrastructure, and the intersection of emerging technologies with finance. Her articles explore how new protocols and systems are shaping the evolving digital economy.

She prioritises clarity and accuracy when explaining technical developments to a general audience.