On Tuesday, March 19, the SEC issued joint guidance with the CFTC to “finally” provide clarity on how securities laws apply to digital assets. On many issues, including gambling and meme coins, the SEC’s new guidance is a welcome development and a notable improvement over Gensler’s days. It also correctly recognizes that the agency’s “regulation by enforcement” campaign under Chairman Gensler had muddied compliance obligations and stifled the industry. But in important ways, the guidance falls short of the full course correction the crypto industry needs.
The biggest deficiency is the SEC’s articulation of the hello test for “investment contract” values. Everyone agrees that most digital assets are not, by themselves, investment contracts. Even SEC Gensler (finally) admitted it, and the SEC’s new guidance reiterates that position. However, the key question is when a digital asset is sold as part of an investment contract so that the sale becomes subject to securities laws.
The statute provides the answer. As a matter of text, history and common sense, an “investment contract” means a contract – an express or implied agreement between the issuer and the investor that the issuer will generate ongoing profits in exchange for the buyer’s investment. Most digital assets are not investment contracts because they are not contracts. A digital asset can be the subject of an investment contract (like any other asset), but can still be sold separately from the investment contract without involving securities laws. In lawsuits filed by Gensler, crypto companies vigorously defended that proper interpretation of the law.
However, the SEC’s new guidance is silent on whether an investment contract requires contractual obligations. Instead, it says that an investment contract travels with a digital asset (at least temporarily) when the “facts and circumstances” show that the developer of the digital asset “induces[ed] an investment of money in a common enterprise with representations or promises to perform essential management efforts”, leading buyers to “reasonably expect to realize profits.” This does not clearly confirm a clear break with the SEC’s previous opinion that hello it avoids “contract law” and requires “a flexible application of the economic reality surrounding the offer, sale and the entire scheme involved, which may include a variety of corresponding promises, commitments and expectations.”
Gensler’s SEC know-it-when-I-see-it approach to hello It was deeply problematic. It allowed the agency to put together an “investment contract” from various public statements by digital asset developers (tweets, whitepapers and other marketing materials), even without concrete promises from the issuers. And it failed to distinguish the values of collectibles like Beanie Babies and trading cards, whose value depends largely on their manufacturer’s marketing and attempts to create scarcity. The SEC missed an important opportunity to clearly reject that approach and restore a key legal dividing line between assets and securities: a contract.
The SEC can still fix this problem, but to do so, it will need to further clarify how the agency intends to enforce hello in the future, and finally break with Gensler’s overly broad interpretation of securities laws. For example, Gensler’s SEC repeatedly cited several “widely distributed promotional statements” as a basis for pushing a digital asset into the realm of investment contracts. The SEC’s new guidance puts some barriers on that approach by requiring that a developer’s representations or promises be “explicit and unambiguous,” “contain sufficient detail,” and occur prior to the purchase of the digital asset. But even that improved approach leaves too much room for interpretation. It could be applied broadly by private plaintiffs, the courts or a future SEC. Rather than continuing down the path taken by Gensler, the SEC should make clear that mere public statements affecting value are insufficient and that promises and representations must be made in the context of the specific sale at issue, not pieced together from technical documents or social media posts that many buyers likely never considered.
The SEC should also clarify its approach to secondary market trading. Fortunately, the agency now recognizes that digital assets are not “in perpetuity” investment contracts just because they were once “subject to” investment contracts. But the agency also says that digital assets remain “subject to” investment contracts traded on secondary markets (such as exchanges) as long as buyers “reasonably expect” that the “representations and promises of issuers remain connected” to the asset. The SEC says little about how to evaluate those reasonable expectations and provides only two “non-exclusive” examples of when an investment contract is “separated” from a digital asset. And it says nothing about whether a secondary market buyer must have a contractual relationship with the token issuer. That leaves it unclear whether the SEC has truly abandoned the Gensler-era view that investment contracts “travel with” or are “embodied” by cryptographic tokens.
Instead of such mixed messages, the SEC should impose significant restrictions on the application of securities laws to secondary market transactions by adopting Judge Analisa Torres’ approach in Vibe. Judge Torres recognized that it is not reasonable to infer an investment contract in the context of “blind bid-ask” transactions, that is, transactions in which the counterparties do not know each other’s identities (as is common in secondary market transactions). Because buyers have no idea whether their money is going to the issuer of a token or an unknown third party, they cannot reasonably expect the seller to use buyers’ money to generate and deliver profits. The SEC should expressly endorse Judge Torres’ analysis.
These are not academic objections. The current SEC may not read or enforce its new guidelines in a way that threatens the viability of the cryptocurrency industry in the United States. But by not clearly rejecting the excesses of the Gensler era, the new SEC guidance leaves the industry exposed to a future SEC that could take advantage of ambiguities in current SEC guidance to resume regulation through enforcement. Private plaintiffs could try to do the same in lawsuits against key industry players (such as major stock exchanges). And in the meantime, the SEC’s interpretations could distort the basis of securities law during negotiations over market structure litigation.
The SEC invited comments on its guidance and the industry should do so. The SEC should get its due credit. But the industry should not hesitate to highlight persistent flaws and ambiguities in the agency’s approach and advocate for clear, meaningful, and permanent restrictions to ensure regulatory clarity and stability. It is not enough to simply revamp the legal architecture of the latest law enforcement campaign.
