The SEC’s latest crypto guidance still leaves too much unsaid
The regulatory agency’s reset is real, but the new details stop short of the full course correction the industry needs, say Gibson Dunn attorneys.
On Tuesday, March 19, the SEC issued joint guidance with the CFTC to “finally” provide clarity about how the securities laws apply to digital assets. On many issues, including staking and meme coins, the SEC’s new guidance is a welcome development and a marked improvement from the Gensler days. It also rightly acknowledges that the agency’s “regulation by enforcement” campaign under Chair Gensler had muddied compliance obligations and stifled the industry. But in important ways, the guidance stops short of the full course correction the crypto industry needs.
The biggest shortcoming is the SEC’s articulation of the Howey test for “investment contract” securities. All agree that most digital assets are not, on their own, investment contracts. Even the Gensler SEC (eventually) admitted as much, and the SEC’s new guidance reiterates that position. The key question, though, is when a digital asset is sold as part of an investment contract such that the sale becomes subject to the 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 investor under which the issuer will deliver ongoing profits in return for the purchaser’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 it can still be sold separately from the investment contract without implicating the securities laws. In the suits brought by Gensler, crypto companies vigorously defended that proper interpretation of the law.
Yet the SEC’s new guidance is silent about whether an investment contract requires contractual obligations. Instead, it says an investment contract travels with a digital asset (at least temporarily) when the “facts and circumstances” show the digital-asset developer “induc[ed] an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts,” leading purchasers to “reasonably expect to derive profits.” That does not clearly confirm a clean break from the SEC’s former view that Howey eschews “contract law” and demands “a flexible application of the economic reality surrounding the offer, sale and entire scheme at issue, which may include a variety of promises, undertakings and corresponding expectations.”
The Gensler SEC’s know-it-when-I-see-it approach to Howey was deeply problematic. It allowed the agency to piece together an “investment contract” from various public statements by digital-asset developers — tweets, white papers, and other marketing materials — even absent concrete promises by the issuers. And it failed to distinguish securities from collectibles like Beanie Babies and trading cards, the value of which depends heavily on their maker’s marketing and attempts to create scarcity. The SEC missed an important opportunity to clearly reject that approach and restore a key statutory 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 apply Howey going forward — and to finally make a clean break with Gensler’s overbroad interpretation of the securities laws. For example, the Gensler SEC repeatedly cited various “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 guardrails on that approach by requiring a developer’s representations or promises to be “explicit and unambiguous,” to “contain sufficient details,” and to occur before the purchase of the digital asset. But even that improved approach leaves too much room for interpretation. It could be expansively applied by private plaintiffs, the courts or a future SEC. Rather than continue down the path Gensler trod, 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 strung together from whitepapers or social-media posts that many purchasers likely never considered.
