SEC Clears Token Buybacks on Live Networks, Warns Against Unfinished Ones

The Securities and Exchange Commission (SEC) has provided guidance on token buybacks in a recent batch of FAQs from the Division of Corporation Finance. The guidance states that an issuer's announcement of a non-security crypto asset buyback program would not constitute a representation or promise to undertake essential managerial efforts.

This means that for functional crypto systems, announcing a buyback program does not automatically classify a token as a security under the Howey test. However, networks that aren't yet functional come with a caveat: if an issuer presents the buyback as creating yield or return for token holders before the network is live, it may be considered a security.

The guidance also clarifies that paying for upgrades and maintenance does not amount to managerial effort, but passing obligations to another entity can still subject the token to the original investment contract. Additionally, exchanges listing tokens are treated as promoters only if they meet Rule 405's definition of a promoter under the Securities Act.

The FAQs signal the staff's thinking on these matters, but it is essential to note that they have no legal force or effect until the Commission adopts them as rules.