When a Crypto Asset Is (and Isn't) Subject to an Investment Contract: The SEC's New Framework Explained
If you have issued a token, operate a trading platform, provide custody, or otherwise participate in the digital asset markets, the SEC and CFTC’s joint interpretive release of March 17, 2026 (the “Release”) may have just changed your regulatory exposure in ways that are not yet widely understood. Issued jointly by the U.S. Securities and Exchange Commission (the “Commission”) and the U.S. Commodity Futures Trading Commission (the “CFTC”), the Release clarifies how the U.S. federal securities laws apply to crypto assets and to transactions in crypto assets.[1] The Release is the most consequential Commission-level interpretive statement on crypto assets in nearly a decade. It organizes crypto assets into five categories: digital commodities, digital collectibles, digital tools, stablecoins, and digital securities.[2] The first three categories, as described in the Release, are deemed not to be securities.[3]Stablecoins may be securities depending on their characteristics.[4] Digital securities are always securities.[5] The Commission acknowledged that some crypto assets may exist outside these categories.[6] Token issuers need to understand whether their past offerings created investment contracts and what they must do to demonstrate that those contracts have run their course. Trading platforms, custodians, and market makers need to assess whether the assets they handle have traveled into or back out of securities territory. The Release also provides guidance on protocol mining and staking, wrapping, and airdrops.[7]
While all that guidance is welcome, much of it appeared in some form in earlier staff statements.[8] The primary benefit of its rearticulation here is greater detail and the weight of a Commission-level interpretation.
Four institutional points about the Release are worth flagging at the outset. First, the Release was adopted by an all-Republican, three-member Commission.[9] Commissioner Crenshaw, the last Democratic commissioner, departed the SEC on January 3, 2026, and the President had not nominated a successor by the time the Release was issued.[10] There is therefore no dissenting or concurring statement accompanying the Release. A dissenting Commissioner's statement, had one existed, would have provided a formally published, institutionally credentialed counterargument that litigants challenging the Release's positions could invoke directly. Without it, challengers must reconstruct the opposing case from external sources. The absence of bipartisan buy-in also makes the Release more susceptible to revision by a future Commission than a notice-and-comment rule would be.[11]
Second, the Release is the first major output of a Joint Harmonization Initiative (“JHI”) launched by the SEC and CFTC in conjunction with a Memorandum of Understanding (“MOU”) signed March 11, 2026 by SEC Chairman Atkins and CFTC Chairman Selig.[12] The MOU commits both agencies to "clarify, coordinate, and harmonize" across six areas of shared regulatory interest, including, but not limited to, crypto assets, and supersedes the agencies' 2018 coordination MOU, while leaving the agencies' separate 2004 MOU on security futures products in force. The JHI operationalizes those commitments through designated staff from each agency. [13] The Release, issued six days after the MOU was signed, is the first product of that structure, and the CFTC's role as co-issuer reflects the coordination framework the two instruments together establish.
Third, the Release was issued against the backdrop of pending legislation that, if enacted, would supplant much of the Section IV framework with a statutory regime structured around different operative concepts. The shape of that legislation, and its principal points of divergence from the Release, are addressed at the end of this article.
Fourth, because the Release is interpretive rather than legislative, and because Chevron deference has been eliminated, courts are likely to evaluate the Release principally for its persuasive force rather than treat it as controlling.
The most significant and most novel section of the Release is Section IV, which addresses how a crypto asset that is not itself a security (a digital commodity, digital collectible, digital tool, qualifying stablecoin, or other non-security crypto asset) may become subject to an investment contract, which is a security.[14]
That process matters for two reasons. First, when a non-security crypto asset is subject to an investment contract, the issuer (which the Release defines broadly to include affiliates and agents of the issuer or a promoter[15]) must comply with the requirements applicable to offers and sales of securities, including the antifraud provisions. Second, the framework has wide-ranging implications for the persons and entities that trade, custody, and otherwise facilitate transactions in crypto assets in secondary markets, many of whom currently operate outside the federal securities laws on the assumption that the assets they handle are not securities.
This article walks through Section IV in detail. It explains the Release’s view on how a non-security crypto asset becomes subject to an investment contract, how and when the asset can separate from the investment contract, and what those determinations mean in practice for the various market participants who touch the asset. To make the framework concrete, the article works through a detailed hypothetical, Project PhoFi, that illustrates both the clean case and a contested edge case.
How Crypto Assets Become Subject to an Investment Contract
Section 2(a)(1) of the Securities Act of 1933 includes "investment contract" in its enumerated list of instruments defined as a "security."[16] The term "investment contract" is not itself defined by statute or Commission rule, and the seminal case on its meaning is of course the Supreme Court's decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), which defines an investment contract as a "contract, transaction, or scheme involving (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits derived from the efforts of others."[17] Every element must be satisfied. It is applied based on the economic realities of the transaction rather than on the labels the parties attach to it.[18]
In a typical crypto offering, the first two prongs are usually, though not always, uncontested. Purchasers pay money (or other consideration) for the asset, and the proceeds are pooled and deployed by the issuer to develop a network or product whose success is shared across token holders. The bulk of the analytical work is done with the third prong: whether a purchaser had a reasonable expectation of profits derived from the efforts of others. That inquiry is fact-intensive and asks what a hypothetical reasonable purchaser would have understood at the time of the offer or sale.
Section IV.A’s contribution is to specify, for crypto offerings, where that reasonable expectation comes from. The answer is: from the issuer's representations and promises. How an issuer markets and promotes a contract, transaction, or scheme is what creates (or fails to create) the reasonable expectation that supplies the third Howey prong.[19]
One preliminary point. The Release is emphatic on the asset/transaction distinction: the fact that a non-security crypto asset is subject to an investment contract does not transform the asset itself into a security.[20] What is or is not a security is the transaction (the contract, transaction, or scheme) not the token. A digital commodity remains a digital commodity even when it is the subject of an investment contract. This distinction is what makes the separation analysis in Section IV.B possible, and what drives the secondary-market analysis that follows from it. It is the premise on which the rest of Section IV builds.
With that in mind, the Release’s formulation is this:
“A non-security crypto asset becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits.”[21]
A few things worth flagging:
First, what matters is the issuer's representations and promises, not the technical attributes of the token or the structure of the offering vehicle.
Second, those representations and promises must concern "those essential managerial efforts which affect the failure or success of the enterprise," as distinguished from administrative or ministerial activities, which the Release notes are insufficient under Howey's third prong.[22] The line between the two is also reflected in the Release's digital commodity analysis in Section III.A and its protocol mining and staking analysis in Section V, both of which rest on the principle that ordinary protocol maintenance, validator operation, and routine open-source contribution by parties associated with the original issuer do not, on their own, satisfy the prong.[23]
Third, the expectation of profit must be one that a reasonable purchaser would form on the basis of the issuer's representations, which means the inquiry is objective in form even where the inputs are issuer-specific.
Fourth, the universe of communications relevant to the analysis is much broader than the offering documents proper: roadmap announcements, exchange-listing communications, statements about anticipated token-value growth, plans for future ecosystem buildout, planned protocol upgrades, and descriptions of the team's intended development work all potentially enter the analysis if they would create a reasonable expectation that purchasers will profit from the team's efforts. The legal analysis of an offering can no longer be confined to the four corners of a whitepaper or SAFT; it must encompass the full set of communications the issuer (broadly defined) has put into the market.
I examine each phrase in this formulation below and then work through an example.
The "Issuer" Concept Is Broad
The Release defines "issuer" expansively. For purposes of Section IV, the term includes affiliates and agents of the issuer or a promoter.[24] That sweep is broad. It means:
A foundation or development company that creates and distributes a token is an issuer.
A separate corporate affiliate of that foundation or development company that markets the token is an issuer.
A promoter retained to publicize the offering is an issuer.
An agent (for example, a marketing firm or an authorized spokesperson) is an issuer for these purposes.
In practice, the analysis cannot be sidestepped by inserting a layer of corporate separation between the entity that prints the token and the entity that does the talking. If a promoter or affiliate is making the representations, the Commission will treat those representations as the issuer's. Conversely, the Commission is also clear that representations by genuinely unaffiliated third parties (an enthusiastic community member, an independent commentator, a holder evangelizing on social media, etc) are not attributed to the issuer unless the issuer authorized them and they were conveyed to purchasers.[25]
However, where a third party and the issuer collude to convey representations or promises, the third party's words are attributed to the issuer.[26]
The Four Dimensions of "Representations or Promises"
The Release identifies four dimensions along which the reasonableness of a purchaser's profit expectations is assessed.[27]
1. Source. The representations must come from (or be authorized by) the issuer.[28] Statements by unaffiliated third parties such as "DeFi influencers" with no relationship to the project, holders posting on Reddit, exchange listing announcements, generally do not count. The exception is collusion between the issuer and the third party: where the issuer is using a third party as a mouthpiece, the third party's statements bind the issuer.[29] The drafting suggests the Commission has in mind both quiet co-marketing arrangements and more aggressive scenarios where issuers seed talking points through ostensibly independent voices.
2. Timing. Representations must be conveyed to the purchaser prior to or contemporaneously with the offer or sale.[30] This is critical and clarifies a point that has bedeviled Howey analysis in crypto. Post-sale statements do not retroactively convert a prior sale into the sale of an investment contract.[31] If the project team makes promises at t=10 about essential managerial efforts they intend to undertake, and a purchaser bought tokens at t=5, those promises do not transform the t=5 sale.
3. Manner. The Release identifies channels through which representations carry weight: written or oral agreements, public communications through which the issuer has established a regular pattern of communicating (the issuer's website, official social media accounts), direct private communications between the issuer and purchasers, regulatory filings publicly available to purchasers, and documents clearly attributable to the issuer (notably, a whitepaper).[32] Outside those channels, the analysis turns on three sub-factors: how widely the representations were disseminated, the specific means used, and the issuer's established communication practices.[33]
4. Specificity. Representations are more likely to create reasonable profit expectations when they are explicit and unambiguous about the essential managerial efforts to be undertaken, contain enough detail to demonstrate the issuer's ability to execute, and explain how the issuer's efforts will produce profits for token holders.[34] The Release gives a concrete benchmark: a representation to develop functionality for a token (or its associated network) accompanied by a business plan with detailed milestones, a timeline, information about personnel, sources of funding, and other resources needed will likely create a reasonable expectation of profit.[35]Vague aspirational statements without an actionable plan likely will not.[36] The "explicit and unambiguous" formulation tightens the prior staff position. The Commission staff's superseded April 2019 Framework for "Investment Contract" Analysis of Digital Assets held that a reasonable expectation of profits could be inferred from "implicit" or "implied" representations.[37]
It is also worth flagging that the Release’s exclusive focus on the issuer’s representations and promises departs not just from the 2019 Framework but from case law’s economic-realities mandate.[38] The 2019 Framework, following that law, identified, among many relevant considerations, whether an "Active Participant" was responsible for the development, improvement, operation, or promotion of the network, owned relevant intellectual property, or retained a stake giving it the ability to realize capital appreciation from the value of the digital asset.[39] These factors were directed at the actual economic structure of the asset. The Release’s formulation drops those structural inquiries in favor of a disclosure-based test. The practical risk is that courts applying Howey on economic-realities grounds may continue to find investment contracts in offerings where the issuer made no detailed representations at all. Issuers and counsel relying on the Release should be aware that the absence of milestone-level representations is not, by itself, a complete defense.
A Worked Example
Consider a hypothetical: Project PhoFi. A team incorporates PhoFi Labs Inc. ("PhoFi Labs") to build a decentralized photo-storage protocol. They form a Cayman foundation, the PhoFi Foundation (the "Foundation"), to issue the PhoFi token. PhoFi Labs is wholly owned by the same individuals who control the Foundation.
The Foundation publishes a whitepaper at t=0 describing:
The technical architecture of the proposed PhoFi network,
A roadmap with three discrete milestones (testnet by Q2, mainnet by Q4, on-chain governance the following year),
The role PhoFi tokens will play (gas, staking, governance rights),
A specified development budget of $25 million, sources of expected funding, and bios of named engineers.
PhoFi Labs runs an active account on X, has a website with a "roadmap" page that mirrors the whitepaper, and the Foundation's CEO gives podcast interviews discussing the same milestones. The Foundation conducts a SAFT-based pre-sale at t=1, with delivery of PhoFi tokens at network launch.
Applying the framework:
Issuer. Both the Foundation (the formal token issuer) and PhoFi Labs (its affiliate, controlled by the same principals, conducting the marketing) are issuers under the Release's definition. The CEO speaking on a podcast is an agent. Their statements are all attributed to the issuer.
Source. The whitepaper, the website, the X account, and the CEO interviews all come from the issuer or its agents.
Timing. All of the foregoing statements were made at or before t=1 (the SAFT pre-sale). They precede the offer and sale. They count toward the Howey analysis at the time of sale.
Manner. The whitepaper is a document attributable to the issuer. The website and the official X account are channels through which the issuer has established a regular pattern of communicating. The CEO interviews are oral statements by an agent. All four channels qualify.
Specificity. The roadmap has milestones, a timeline, a stated budget, identified personnel, and a clear theory for how the Foundation's efforts produce token-holder profits (build the network → drive adoption → drive utility demand for PhoFi). This is the paradigmatic case the Release flags as creating a reasonable expectation of profit.
Result: The SAFT pre-sale at t=1 offers and sells an investment contract. The PhoFi tokens are not themselves securities (PhoFi may, depending on its characteristics on launch, be a digital commodity within the meaning of Section III.A of the Release) but they are subject to the investment contract. The investment contract itself is a security under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. The investment-contract status of the PhoFi tokens is then re-assessed at delivery and continually thereafter, under the framework in Section IV.B below. Whether the tokens remain subject to the investment contract upon and after delivery turns on whether the Foundation has fulfilled or failed its representations by the relevant moment.
The above presents a clean case. In practice, the analysis is rarely this tidy. Here is a variation where the framework produces a contestable outcome.
Variation: The Community Manager's Statement. At t=3, three months after the SAFT closes, the Foundation's community manager, hired on a part-time consulting contract to moderate the official Discord, posts in the Foundation's Discord server: "The team is targeting Q4 for mainnet. The ecosystem fund will be deployed to incentivize DeFi protocols to build on PhoFi. Big things ahead for price." The post stays up for two weeks before being deleted. The Foundation never publicly acknowledges or repudiates it. The post is screen-captured and widely circulated on X.
The Release defines "issuer" to include agents. Whether the community manager is an "agent" for purposes of Section IV is not obvious. The consulting contract presumably did not authorize investment representations. But the Foundation chose to deploy a compensated contractor in an official channel it controls, and the Release's "collusion" language covers deliberate coordination without clearly addressing negligent authorization.
The harder question is timing: the SAFT closed at t=1, and post-sale statements do not retroactively convert a prior sale. A secondary purchaser who bought SAFT rights at t=4, after reading the screen-captured post and relying on it, has a colorable argument that the statement was part of the relevant communications record. The Foundation's two-week delay in removing the post, and its failure to repudiate it, strengthens that argument.
Practical upshot. Issuers should establish and enforce communications protocols covering all individuals who post in official channels, regardless of employment status. A prompt and unambiguous public repudiation (posted in the same channel, with the same visibility) is a good strategy for limiting attribution.
Secondary Market Transactions
Section IV.A closes with an interpretation that has significant market consequences. A non-security crypto asset that has been subject to an investment contract does not automatically remain subject to that contract in secondary market transactions.[40] The test is whether purchasers in the secondary market would reasonably expect the issuer's representations or promises to engage in essential managerial efforts to remain connected to the non-security asset. If yes, the investment contract travels with the asset and secondary trades are securities transactions that must be registered under the Securities Act or conducted under an available exemption. If no, secondary trades are not securities transactions.[41]
The investment contract is not magically severed by the act of resale; it is severed by the dissolution of the reasonable expectation that links the asset to the issuer's promises. Section IV.B then explains how that dissolution occurs.
Two caveats on judicial reception.
First, the Release's treatment of secondary market transactions (under which an investment contract can persist in secondary trading if the issuer's representations remain live) is in tension with existing case law on multiple axes. In SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023), Judge Torres held that Ripple's "Programmatic Sales" of XRP through trading algorithms on digital asset exchanges did not satisfy Howey's third prong. Since programmatic buyers "could not have known if their payments of money went to Ripple, or any other seller of XRP," they could not have formed an expectation of profit derived from Ripple's particular efforts.[42] Importantly, Judge Torres treated XRP itself as not inherently a security — the asset was not "in and of itself a 'contract, transaction[,] or scheme' that embodies the Howey requirements" — and located the securities analysis in the totality of circumstances surrounding each category of transaction.[43] The Release does not engage Ripple's manner-of-sale reasoning or explain how the Release's representation-focused framework applies to anonymous exchange transactions in which the buyer has no awareness of the issuer's role on the other side of the trade.[44]
Second, there is divergence in the opposite direction. In SEC v. Terraform Labs Pte. Ltd.[45], Judge Rakoff affirmatively rejected Ripple's manner-of-sale distinction, holding that Howey "makes no such distinction between purchasers" and that public representations by the issuer could reach secondary market purchasers as effectively as direct purchasers. Judge Failla adopted the same approach in SEC v. Coinbase, Inc., 726 F. Supp. 3d 260, 293 (S.D.N.Y. 2024). The Release nominally embraces the Terraform/Coinbase intuition that issuer representations can carry the Howey analysis, but it then imposes three doctrinal limits on that intuition that have no clear foothold in either Terraform or Coinbase and that a court following Judge Rakoff's or Failla's reasoning could decline to recognize.
The first limit is on the source of representations. The Release provides that representations from unaffiliated third parties do not factor into the Howey analysis unless authorized by the issuer. Neither Terraform nor Coinbase applied that constraint; both treated the relevant question as whether a reasonable purchaser would objectively view the representations as evincing a promise of profits, without much focus on whether the speaker was the formal issuer or an affiliate. The second limit is on the duration of representations. The Release recognizes a separation concept under which an investment contract can terminate when the issuer fulfills its promised essential managerial efforts or unambiguously abandons them, with fulfillment measured against the issuer's own definitions of what was promised. Neither Terraform nor Coinbase recognized any analogous termination concept. The third limit is on the common enterprise prong. The Release affirms that common enterprise is a required element of Howey, which in turn may make it harder for secondary market transactions to satisfy Howey under the Release's framework than under a Terraform-style analysis.
The upshot is that the Release's framework may diverge from judicial outcomes in either direction. Courts following Ripple may hold that some secondary transactions the Release would treat as securities transactions are not, on the ground that the buyer never connected its capital to the issuer's efforts. Courts following Terraform and Coinbase may hold that some transactions the Release would exclude are nevertheless investment contracts.
For platforms and other intermediaries, an asset cannot be treated as safely outside the federal securities laws merely because the token itself is not a security; the platform must continue to evaluate whether the market narrative remains anchored to the issuer's ongoing essential managerial efforts. Conversely, an asset that was once tied to such a narrative may, in time, separate from it.
How Crypto Assets Separate from an Investment Contract
Section IV.B is the most novel piece of the Release. It identifies two non-exclusive paths to separation: fulfillment and failure.[46]The idea (that an investment contract can run its course and that subsequent transactions in the formerly-subject token are not securities transactions "simply by virtue of the token's origin story") was previewed in Chairman Atkins's November 12, 2025 speech[47] and elaborated in his March 17, 2026 remarks delivered concurrently with the Release ("Regulation Crypto Assets: A Token Safe Harbor").[48] More importantly for issuers and their counsel, the Token Safe Harbor proposal Chairman Atkins previewed contemplates a rule-based “investment contract safe harbor” that would operationalize separation upon completion or permanent cessation of the issuer’s essential managerial efforts.[49] Practitioners should be aware that the conditions under which the proposed safe harbor will treat separation as having occurred may diverge from the principles-based standards in Section IV.B.
The underlying principle is the Howey prong itself. A non-security crypto asset remains subject to an investment contract only so long as purchasers continue to have a reasonable expectation of profits to be derived from the issuer's essential managerial efforts.[50] Once that expectation can no longer reasonably be held, the Howey analysis ends, the investment contract ceases to exist, and the asset is no longer subject to it.
Importantly, separation can occur at any point after the initial offer: immediately upon delivery, at a future date, or somewhere in between.[51] There is no minimum period and no statutory waiting interval.
1. Fulfillment of the Issuer's Representations or Promises
The first path to separation is fulfillment. Once the issuer has fulfilled the essential managerial efforts it represented or promised it would undertake, the asset is no longer subject to the investment contract.[52] Purchasers can no longer reasonably expect profits from those efforts because the efforts are complete. The investment contract, having served its purpose, ceases to exist.
The Release makes a number of subordinate points that are practically important:
Continuing non-essential efforts are permitted. The issuer can continue providing efforts that are not essential managerial efforts with respect to the crypto asset or its associated network without re-creating an investment contract.[53] The line between essential managerial efforts and ministerial or administrative work, drawn in Section V's protocol mining and staking analyses, and reflected in the digital commodity analysis in Section III.A, remains the operative distinction.
Examples of fulfillable efforts. The Release lists three illustrative categories: developing certain functionalities or features for the crypto asset or associated network; achieving software development milestones on a roadmap; and open-sourcing related computer code.[54]
The issuer's own definitions control. Whether the issuer has fulfilled representations to "achieve decentralization" or "achieve functionality" is judged by how the issuer defined or otherwise described those concepts in marketing the offering, not by reference to a general market conception of decentralization or functionality.[55] That places enormous practical weight on the issuer's drafting choices in the whitepaper, on the website, and in marketing materials. Vague aspirational language is not just less likely to create an investment contract at the front end; it also makes fulfillment harder to demonstrate at the back end.
The Release distinguishes between immediate-delivery offerings (typified by the classic ICO, where tokens are delivered to investors at the time of purchase) and delayed-delivery offerings (typified by the SAFT, where tokens are delivered later). In both cases, the sale occurs at the time of entry into the agreement, with settlement either contemporaneous or delayed.[56] The investment-contract status of the asset, however, must be assessed at delivery and continually thereafter. The Release illustrates:
If, at delivery, the issuer has publicly disclosed that it has completed the essential managerial efforts it represented or promised, the asset is no longer subject to the investment contract upon delivery.[57]
If, at delivery, the issuer has continued to perform essential managerial efforts in accordance with its representations or has not disclosed completion, the asset continues to be subject to the investment contract upon delivery.[58]
One question the Release does not resolve concerns the interaction between fungibility and the transaction-based nature of the Howey test. Because crypto assets are typically fungible, there is no straightforward mechanism for distinguishing units sold as part of an investment contract from units that are not. [59] If an issuer makes new or renewed representations in connection with even a limited distribution of an otherwise widely circulating token, those representations may be relevant to the expectations of at least some subsequent purchasers. Yet neither purchasers nor intermediaries can identify which specific units, if any, are associated with those representations. The Release does not explain how this transaction-specific inquiry can be operationalized in markets where the asset itself is technically indistinguishable across units. Where market participants no longer reasonably rely on issuer efforts, this tension may have limited practical significance. But where issuer involvement is ongoing, ambiguous, or reintroduced, intermediaries cannot readily translate the Howey framework into unit-level determinations, and the Release’s secondary-market discussion does not provide a clear basis for resolving that uncertainty.[60]
2. Failure to Satisfy the Issuer's Representations or Promises
The second path to separation is failure. A non-security crypto asset is no longer subject to an investment contract if a purchaser would not reasonably expect the issuer to be able to fulfill, or to continue to engage in, the essential managerial efforts it represented or promised.[61]
Failure, in turn, can manifest in two forms:
Implicit failure through passage of time and inaction. If a sufficiently long period has passed since the offer and sale, and during that period it has become clear that the issuer has neither performed the promised efforts nor indicated an intent to do so, purchasers can no longer reasonably expect the original representations to remain connected to the asset.[62] The Release does not specify how long is "sufficient". That is necessarily fact-specific.
Express abandonment. If the issuer publicly announces that it will no longer perform the essential managerial efforts it represented or promised (effectively abandoning the project), the connection is severed.[63] The Release explains that such announcement must be widely disseminated to market participants and unambiguous.[64] A buried tweet at 2:00 a.m. will not do; a press release, a website notice, and notification to known holders, all stating clearly that development will not continue, would. The act of abandonment is itself a potential securities-law event: the Release notes that an issuer can incur liability under the federal securities laws for the abandonment, not merely for past misstatements during the life of the investment contract.[65] An abandonment announcement is therefore both a forward-looking severance mechanism and a backward-looking liability trigger.
The critical caveat in Section IV.B.2 is that failure terminates the investment contract going forward but does not absolve the issuer of liability for the original sale. Indeed, a failed issuer may face more liability, not less: the Release notes that an issuer that fails to perform or complete promised essential managerial efforts may face liability under the federal securities laws for those failures, including under the antifraud provisions.[66] The investment contract terminating is a question about the asset's prospective status; it is not a release of claims.
3. Application of the Interpretation
Section IV.B.3 makes two important points:
Separation does not retroactively cleanse the original offering. This is one of the most consequential points in Section IV.B for issuers and their counsel, and bears repeating. If an issuer offered and sold an investment contract without registration and without an available exemption, the issuer violated Section 5[67] at the time of that offering. That violation persists. Investors retain rights against the issuer under the federal securities laws, including Section 12(a)(1)[68] rescission rights and antifraud claims, even if the asset has long since separated from the investment contract and the investment contract no longer exists.[69] The forward separation analysis in Section IV.B is not a Section 5 exoneration mechanism.
Antifraud liability survives the investment contract. Material misstatements or omissions made in connection with the creation of the investment contract, or at any time during its existence, can ground liability under Section 17 of the Securities Act,[70] Section 10(b) of the Exchange Act,[71] and Rule 10b-5[72], even after the asset has separated and the investment contract has ceased to exist.[73] Issuers should not assume that a successful pivot to "decentralization" or a clean fulfillment narrative inoculates against earlier antifraud exposure.
The CLARITY Act and the Section IV Framework
The Release was issued against the backdrop of pending federal legislation that, if enacted, would substantially supplant the Section IV framework with a statutory regime structured around different operative concepts. The Digital Asset Market Clarity Act (the "CLARITY Act") passed the House of Representatives on July 17, 2025. The Senate Banking Committee has noticed a markup of the bill for May 14, 2026, the first scheduled markup since negotiations stalled in January. Substantial procedural hurdles remain: Senate Banking Committee passage, a full Senate floor vote subject to a 60-vote threshold, Senate Agriculture Committee action on its parallel version, reconciliation between the two Senate versions, and conference reconciliation with the House-passed text. Whether and in what form the bill becomes law remains uncertain. The discussion below assumes the CLARITY Act in its House-passed form.
Two structural points of divergence between the Release's Section IV framework and the CLARITY Act are worth flagging.
First, CLARITY contains a secondary-market rule that operates without reference to reasonable expectations: once a digital asset is resold or otherwise transferred by a person other than the issuer or an affiliate or related person of the issuer, the asset ceases to qualify as an investment contract asset and trades as a digital commodity. That rule, if enacted, would foreclose much of the Section IV.A analysis under which an investment contract may travel with the asset into secondary trading where purchasers continue to expect issuer efforts. The Release asks whether the reasonable-expectations linkage persists; CLARITY asks who is selling.
Second, CLARITY operationalizes separation through a "mature blockchain system" certification regime in lieu of the principles-based fulfillment or failure inquiry of Section IV.B. An issuer, an affiliate or related person of the issuer, or a decentralized governance system may certify maturity, after which insiders may sell in secondary markets without registration as securities transactions.
The Release is an interpretive release reflecting the current Commission's reading of existing statutory text and may be revised by a future Commission without notice-and-comment proceedings. CLARITY, by contrast, would amend the underlying statutes themselves. Any displacement of the Release's positions would be statutory rather than interpretive, and would carry correspondingly greater durability.
About the Author
Ingram Weber advises token issuers, trading platforms, custodians, and other digital asset market participants on U.S. federal securities law compliance, regulatory strategy, and enforcement matters, with particular expertise in cross-border issues involving Japan and Singapore and, more broadly, the Asia-Pacific region. He previously served as Special Counsel in the SEC's Division of Corporation Finance, where he helped draft crypto regulations and advised on the CLARITY Act. Before the SEC, he spent nearly a decade at Sullivan & Cromwell and Allen & Overy advising on cross-border capital markets transactions in Tokyo and Singapore. If the issues discussed in this article are relevant to your business, schedule a call.
End Notes
[1]Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets, Securities Act Release No. 33-11412, Exchange Act Release No. 34-105020, File No. S7-2026-09 (Mar. 17, 2026), available at https://www.sec.gov/files/rules/interp/2026/33-11412.pdf.
[2]Release § III, at 13.
[3]Release § III.A, at 14 (digital commodities); § III.B, at 16 (digital collectibles); § III.C, at 20 (digital tools).
[4]Release § III.D, at 21 ("Stablecoins other than payment stablecoins issued by a permitted payment stablecoin issuer may meet the definition of 'security' depending on the facts and circumstances."). Payment stablecoins issued by a permitted payment stablecoin issuer are excluded from the definition of "security" by operation of the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025, Pub. L. No. 119-27, § 17, 139 Stat. 419 (the "GENIUS Act"). See Release § III.D, at 21–23.
[5]Release § III.E, at 23.
[6]Release § III, at 13–14 ("[T]here may be crypto assets that do not fall within any of these five categories, as well as crypto assets with hybrid characteristics that may fall within more than one category.").
[7]Release § V, at 34 (protocol mining and staking); § VI, at 54 (wrapping); § VII, at 58 (airdrops).
[8]See, e.g., Div. of Corp. Fin., Sec. & Exch. Comm'n, Staff Statement on Meme Coins (Feb. 27, 2025), https://www.sec.gov/newsroom/speeches-statements/staff-statement-meme-coins; Div. of Corp. Fin., Sec. & Exch. Comm'n, Staff Statement on Stablecoins (Apr. 4, 2025), https://www.sec.gov/newsroom/speeches-statements/statement-stablecoins-040425; Div. of Corp. Fin., Sec. & Exch. Comm'n, Staff Statement on Certain Proof-of-Work Mining Activities (Mar. 20, 2025), https://www.sec.gov/newsroom/speeches-statements/statement-certain-proof-work-mining-activities-032025; Div. of Corp. Fin., Sec. & Exch. Comm'n, Staff Statement on Certain Protocol Staking Activities (May 29, 2025), https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925; Div. of Corp. Fin., Sec. & Exch. Comm'n, Staff Statement on Certain Liquid Staking Activities (Aug. 5, 2025), https://www.sec.gov/newsroom/speeches-statements/corpfin-certain-liquid-staking-activities-080525. The Release expressly notes that staff statements "have no legal force or effect" and that "the views expressed by the Commission in this release supersede any prior statements by the Commission or its staff on these topics." Release § III.B, at 18 n.62 (and substantially identical formulations in §§ III.D and V.A).
[9]The Commission has consisted of five members since its establishment under the Securities Exchange Act of 1934. The three-member quorum that adopted the Release is consistent with Commission Rule 41, 17 CFR § 200.41, which generally requires three commissioners to transact business. As of the Release date, the Commission had only three confirmed members: Chairman Paul S. Atkins, Commissioner Hester M. Peirce, and Commissioner Mark T. Uyeda. Commissioner Caroline A. Crenshaw's term expired and she departed January 3, 2026; Commissioner Jaime Lizárraga resigned effective January 17, 2025. The Release therefore reflects the views of a Commission operating with two vacant seats, no Democratic-appointed members, and no internal dissent. For administrative-law purposes, a properly constituted quorum may issue an interpretive release notwithstanding vacancies on the Commission. The political salience of the composition is nonetheless relevant to durability: a Commission returning to full complement, or one reconstituted after a change in administration, could revisit or retract the interpretation without clearing the procedural bar that would apply to a legislative rule.
[10]Commissioner Crenshaw had been the Commission's most vocal critic of the current administration's crypto enforcement posture, dissenting from specific rollbacks of prior settlements and from the Commission's broader policy reorientation. Her departure eliminated the only sitting commissioner who had consistently criticized aspects of the Commission’s recent crypto policy direction.
[11]The Release is an interpretive release rather than a notice-and-comment rule under APA § 553. Interpretive rules are exempt from APA notice-and-comment requirements, 5 U.S.C. § 553(b)(A), and may be revised or rescinded without a new round of public comment. See Perez v. Mortg. Bankers Ass'n, 575 U.S. 92, 96 (2015). A future Commission could revise or withdraw the Release by publishing a new interpretive release, subject only to the requirement that the change be adequately explained, including a reasoned response to any significant reliance interests on the prior interpretation. See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515–16 (2009); Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 221–22 (2016). That procedural flexibility stands in contrast to a notice-and-comment rule, which would require a new rulemaking proceeding, including public comment, before it could be undone.
[12]The SEC-CFTC Memorandum of Understanding on Regulatory Harmonization, signed March 11, 2026, is the first formal inter-agency agreement between the two regulators specifically addressed to digital assets. The 2026 MOU expressly supersedes the agencies' July 11, 2018 MOU on coordination in areas of common regulatory interest and information sharing, and expressly reaffirms their March 17, 2004 MOU regarding the oversight of security futures product trading and the sharing of SFP information. See 2026 MOU art. III, § 5(c)–(d). Neither prior instrument addressed crypto assets. The 2026 MOU commits both agencies to coordinate across a range of shared regulatory functions, including joint interpretations and rulemakings to clarify product definitions, coordinated examination and enforcement, and the development of a fit-for-purpose framework for crypto assets and other emerging technologies. Chairman Atkins and CFTC Chairman Selig co-signed the MOU as part of the broader Project Crypto initiative to harmonize federal oversight of digital asset markets. The MOU's significance for present purposes is that the CFTC's endorsement of the Release's five-category taxonomy is not merely implicit in the coordination agreement: the CFTC joined the Release directly, providing guidance that the CFTC and its staff will administer the Commodity Exchange Act consistently with the SEC's interpretation. That direct co-issuance matters for market participants who have operated under inconsistent agency positions.
[13]The Joint Harmonization Initiative, co-led by Robert Teply (SEC) and Meghan Tente (CFTC), encompasses a broader scope than crypto alone. The MOU identifies six areas of focus: clarifying product definitions through joint interpretations and rulemakings; modernizing clearing, margin, and collateral frameworks; reducing registration frictions for dually-regulated entities; developing a fit-for-purpose regulatory framework for crypto assets and other emerging technologies; streamlining regulatory reporting for trade data, funds, and intermediaries; and coordinating cross-market examinations, economic analyses, risk monitoring, surveillance, and enforcement. The Release is the first concrete output of the Initiative, but the agencies have indicated that further joint interpretations and rulemakings are anticipated across all six areas. Its practical significance for practitioners is that positions taken in any one JHI output should be read in light of the broader coordination framework.
[14]Release § IV, at 24.
[15]Release § IV.A, at 24 n.83.
[16]Securities Act of 1933 § 2(a)(1). The parallel definition of "security" in the Securities Exchange Act of 1934 is "essentially identical in meaning." SEC v. Edwards, 540 U.S. 389, 393 (2004) (citing Reves v. Ernst & Young, 494 U.S. 56, 61 n.1 (1990)); see Securities Exchange Act of 1934 § 3(a)(10). On the absence of a statutory definition of "investment contract," see Release § II, at 11.
[17]Release § I, at 4 n.7. See also SEC v. Barry, 146 F.4th 1242, 1251 (9th Cir. 2025) (the Howey test "has three elements," including "a common enterprise"); SEC v. Scoville, 913 F.3d 1204, 1220 (10th Cir. 2019) (same).
[18]United Hous. Found., Inc. v. Forman, 421 U.S. 837, 849 (1975) ("[I]n searching for the meaning and scope of the word 'security' . . . form should be disregarded for substance and the emphasis should be on economic reality.").
[19]Release § IV.A, at 24 ("How an issuer markets and promotes a contract, transaction, or scheme is relevant to assessing whether the issuer is offering or selling an investment contract.").
[20] Release § IV.A, at 27
[21]Release § IV.A, at 24–25.
[22]Release § I, at 4 n.7, and § II, at 12 n.42 (citing SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973), and noting that "administrative and ministerial activities are not managerial efforts that satisfy Howey's 'efforts of others' requirement"); see also First Fin. Fed. Sav. & Loan v. E.F. Hutton Mortg., 834 F.2d 685 (8th Cir. 1987); Union Planters Nat'l Bank of Memphis v. Commercial Credit Bus. Loans, Inc., 651 F.2d 1174 (6th Cir. 1981); Donovan v. GMO-Z.com Tr. Co., 779 F. Supp. 3d 372, 388 (S.D.N.Y. 2025).
[23]Release § III.A, at 14–16 (digital commodities); § V.A.3, at 38–40 (Protocol Mining); § V.B.3, at 47–52 (Protocol Staking).
[24]Release § IV.A, at 24 n.83.
[25]Release § IV.A, at 25–26 ("[I]t would not be reasonable for a purchaser to expect profits based on representations or promises made by third parties, such as unaffiliated proponents of the relevant crypto system or holders of the relevant crypto asset, unless the representations or promises are authorized by the issuer and conveyed to purchasers." (citing 17 C.F.R. § 243.101(c) (definition of "person acting on behalf of an issuer" in Regulation FD))).
[26]Release § IV.A, at 26 n.89 ("[W]here the third party and the issuer collude to convey representations or promises, it would be reasonable for a purchaser to expect profits based on those explicit representations or promises.").
[27]Release § IV.A, at 25–27.
[28]Release § IV.A, at 25.
[29]Release § IV.A, at 26 n.89.
[30]Release § IV.A, at 26 ("Of necessity, in order to shape a purchaser's expectations, the representations or promises must be conveyed to the purchaser prior to or contemporaneously with the issuer's offer or sale to the purchaser.").
[31]Release § IV.A, at 26 ("[T]he issuer's post-sale representations or promises would not convert the prior sale into an offer or sale of an investment contract.").
[32]Release § IV.A, at 26.
[33]Release § IV.A, at 26.
[34]Release § IV.A, at 27.
[35]Release § IV.A, at 27.
[36]Release § IV.A, at 27 ("[R]epresentations or promises that are vague or contain no semblance of an actionable business plan, such as those lacking milestones, funding, or other plans for needed resources, likely would not create reasonable expectations of profit.").
[37]Framework for "Investment Contract" Analysis of Digital Assets, Strategic Hub for Innovation and Fin. Tech., Sec. & Exch. Comm'n (Apr. 3, 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets (the “2019 Framework”), superseded by Release § I, at 8 n.21 (and additional supersession citations at footnotes 62, 79, 99, and 100 of the Release).
[38]The "economic realities" mandate traces to the Supreme Court's instruction in United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975), that "the application of these statutes" must "turn on the economic realities underlying a transaction, and not the name appended thereto," and that "the emphasis should be on economic reality." See also SEC v. W.J. Howey Co., 328 U.S. 293, 298 (1946) (defining investment contract by reference to the "substance" of the arrangement).
[39]The 2019 Framework
[40]Release § IV.A, at 27–28.
[41]Release § IV.A, at 28.
[42] Ripple, 682 F. Supp. 3d at 327. Judge Torres also expressly declined to reach whether true secondary market sales by parties unaffiliated with the issuer would constitute investment contracts, observing that "[w]hether a secondary market sale constitutes an offer or sale of an investment contract would depend on the totality of circumstances and the economic reality of that specific contract, transaction, or scheme." Id. at 328 n.16 (citing Marine Bank v. Weaver, 455 U.S. 551, 560 n.11 (1982)). The Programmatic Sales at issue in Ripple were Ripple's own sales executed through exchange algorithms, not third-party-to-third-party resales, and the scope of Ripple's holding on secondary trading is therefore narrower than is sometimes assumed.
[43] Ripple, 682 F. Supp. 3d at 322–24. This is a meaningful framing point for the Release: under Ripple, "digital commodity" status is not a fixed attribute of the asset but a description of the transactional posture in which the asset is currently sold. The same token can move in and out of investment-contract status depending on the circumstances of a particular sale. The Release's by-name listing of XRP as a digital commodity is therefore consistent with Ripple's outcome on Programmatic Sales but does not, on Ripple's own logic, immunize the asset from investment-contract treatment in some future transaction.
[44] The Release supersedes prior staff guidance and prior staff statements but does not purport to address existing judicial precedent. The Ripple appeals were dismissed by joint stipulation in August 2025, and the SEC dismissed Coinbase in February 2025. As a result, the divergent approaches reflected in Ripple, Terraform, and Coinbase remain at the district court level, with no current vehicle for near-term Second Circuit resolution.
[45] SEC v. Terraform Labs Pte. Ltd., No. 23-cv-1346 (JSR), 2023 WL 4858299 (S.D.N.Y. July 31, 2023).
[46]Release § IV.B, at 28.
[47]Paul S. Atkins, Chairman, Sec. & Exch. Comm'n, The SEC’s Approach to Digital Assets: Inside "Project Crypto" (Nov. 12, 2025), https://www.sec.gov/newsroom/speeches-statements/atkins-111225-secs-approach-digital-assets-inside-project-crypto.
[48]Paul S. Atkins, Chairman, Sec. & Exch. Comm'n, Regulation Crypto Assets: A Token Safe Harbor (Mar. 17, 2026),https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-regulation-crypto-assets-031726.
[49] Id.
[50]Release § IV.B, at 28.
[51]Release § IV.B, at 29 ("This separation of the non-security crypto asset from the issuer's representations or promises to engage in essential managerial efforts may occur at any time after the offer of the associated investment contract, such as immediately upon delivery of the non-security crypto asset to purchasers or at a future date.").
[52]Release § IV.B.1, at 29.
[53]Release § IV.B.1, at 29.
[54]Release § IV.B.1, at 29.
[55]Release § IV.B.1, at 29 n.96 ("[I]f the issuer represents or promises to achieve decentralization of an associated crypto system, whether the issuer has achieved decentralization would be based on how the issuer defined or otherwise described decentralization, not a general market conception of what constitutes decentralization.").
[56]Release § IV.B.1, at 30 (citing Securities Offering Reform, Securities Act Release No. 33-8591, 70 Fed. Reg. 44,721, 44,765 n.391 (Aug. 3, 2005)).
[57]Release § IV.B.1, at 30–31.
[58]Release § IV.B.1, at 31.
[59]This difficulty reflects a broader mismatch between securities doctrine and the technical characteristics of digital assets. Traditional securities markets accommodate the coexistence of identical instruments sold in both registered and exempt transactions by relying on transfer restrictions, intermediated recordkeeping, and resale safe harbors such as Rule 144, rather than on intrinsic differences between units. By contrast, most crypto tokens are designed to be freely transferable and fungible at the protocol level. Although certain token implementations, particularly in permissioned or compliance-oriented systems, can embed transfer restrictions directly into smart contracts (for example, through whitelisting or transfer controls), these mechanisms are not widely adopted in public token markets and typically depend on off-chain inputs or administrative control. Traditional markets also use identifiers such as CUSIP numbers to track issuances, but legal status is enforced through intermediaries and transfer restrictions rather than the identifier itself. In the absence of broadly implemented, interoperable transfer controls, intermediaries in crypto markets cannot reliably map transaction-specific legal distinctions onto otherwise identical units, leaving them to rely on asset-level judgments under conditions of legal uncertainty.
[60]The implications for broker-dealers and alternative trading systems are significant, but arise from classification uncertainty rather than from any single rule. A range of obligations under the federal securities laws and self-regulatory organization rules, including, where applicable, custody and customer protection requirements under SEA Rule 15c3-3, turn on whether an asset is a “security.” Those regimes, however, do not provide a clear mechanism for assets whose status depends on the transaction-specific inquiry under the Howey test. Where issuer or affiliate conduct could give rise to a reasonable expectation of profits for some purchasers but not others, intermediaries must make asset-level listing and compliance judgments without the ability to resolve that inquiry at the level of individual transactions. In such circumstances, an intermediary that treats an asset as a non-security based on the Release’s Section IV.A analysis could still face scrutiny if regulators conclude that, in light of contemporaneous facts and circumstances, purchasers were reasonably relying on the efforts of others. The Release effectively places weight on intermediaries’ ongoing diligence and monitoring. Firms that handle assets with evolving or ambiguous fact patterns should therefore adopt and maintain written policies and procedures for initial listing determinations, periodic reassessment, and documentation of the factual bases for those judgments.
[61]Release § IV.B.2, at 31.
[62]Release § IV.B.2, at 31.
[63]Release § IV.B.2, at 31–32.
[64]Release § IV.B.2, at 31 n.98 ("A public announcement of non-performance should be widely disseminated to market participants and unambiguous in order for investors to no longer reasonably expect the issuer to perform the essential managerial efforts.").
[65]Release § IV.B.2, at 32.
[66]Release § IV.B.2, at 32 ("An issuer that fails to perform or otherwise complete the essential managerial efforts it represented or promised it would undertake may face liabilities under the Federal securities laws for these failures, including under the anti-fraud provisions of the Federal securities laws.").
[67]Securities Act of 1933 § 5.
[68]Securities Act of 1933 § 12(a)(1).
[69]Release § IV.B.3, at 33 ("If the issuer fails to register the offering of that investment contract or conduct it pursuant to an available exemption, the issuer will violate the Securities Act and investors will have certain rights against the issuer under the Federal securities laws for this failure to register or use an applicable exemption, even if the non-security crypto asset subsequently separates from the associated investment contract and that investment contract ceases to exist.").
[70]Securities Act of 1933 § 17.
[71]Securities Exchange Act of 1934 § 10(b).
[72]17 C.F.R. § 240.10b-5.
[73]Release § IV.B.3, at 33–34 ("[I]f the issuer makes material misstatements or omissions in connection with the creation of the associated investment contract or at any time during the existence of that investment contract, the issuer may be subject to liability under the anti-fraud provisions of the Federal securities laws for such conduct, even if the non-security crypto asset subsequently separates from the associated investment contract and that investment contract ceases to exist.").
