"Are tokens always securities?" — A historic turning point in US crypto regulation

Author: Su Zitao (Lawyer); Source: Crypto Horizons

For a long time, both regulators and practitioners have held the ingrained mindset of equating tokens with securities. However, the "separation rule" created by the SEC in this new regulation represents a significant breakthrough in this concept. This rule acknowledges the technological neutrality of crypto assets, thereby precisely targeting regulation on "financing activities and commitments," rather than the technological vehicle itself, thus pointing the way for the development and compliance of the Web3 industry.

1. The "Sufficient Decentralization" Viewpoint Sparks Compliance Confusion In June 2018, William Hinman, then Director of the Corporate Finance Division of the U.S. Securities and Exchange Commission (SEC), addressed the severe regulatory anxiety surrounding whether tokens necessarily constitute securities during the ICO boom at the Yahoo Finance Crypto Summit. He famously proposed the "sufficient decentralization" viewpoint: "If a crypto network (such as Ethereum) achieves sufficient decentralization, and buyers no longer rely on the management efforts of a specific core team, then the sale of its tokens no longer constitutes a securities transaction." This statement was widely regarded as a safe haven for compliance at the time, greatly stimulating the short-term prosperity of public blockchain technology and the Web3 ecosystem. In a 2018 speech, William Hinman stated, "If the network on which the token operates is decentralized enough that buyers no longer reasonably expect any one person or group to undertake the necessary administrative or entrepreneurial efforts, then these assets may not constitute an investment contract." However, "decentralized enough" is a highly subjective adjective. How many validator nodes and to what extent should the tokens be distributed to qualify as "decentralized enough"? Early-stage cryptocurrencies inevitably rely on the concentrated development and fundraising efforts of a core development team. This essential path to decentralization is precisely what makes them highly susceptible to triggering the Howe Test, which classifies them as unregistered securities offerings. Due to the lack of quantitative standards, this viewpoint ultimately became a tool for "selective enforcement." Coupled with the subsequent sharp tightening and reversals in the SEC's regulatory stance, this viewpoint not only failed to provide genuine legal certainty but also became the core trigger for major legal controversies such as the Ripple case, plunging the entire crypto industry into a long-term quagmire of "enforcement equals regulation" and a fog surrounding compliance paths. In response, the U.S. Securities and Exchange Commission (SEC) issued the "Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets" on March 17, 2026. This innovatively separates and decouples the "crypto asset itself" from the "investment contract," replacing the difficult-to-quantify concept of "degree of decentralization" with entirely new rules. It establishes an objective review rule system centered on "reasonable profit expectations," providing a clear compliance benchmark for the Web3 industry. 2. Establishment of the “Binding Rule” In this new regulation, the SEC's core legal basis for determining when “non-security crypto assets are bound by an investment contract” (i.e., when crypto assets are “bound” to an investment contract) remains the Howe Test. The SEC explicitly states: Whether a non-security crypto asset is bound by an “investment contract” depends entirely on the issuer's specific marketing and promotion practices. Specifically, when an issuer induces investors to invest in a common endeavor and makes statements or promises to undertake “substantial management efforts,” thereby creating a reasonable expectation of profit for the purchaser, the transaction constitutes an investment contract and is governed by securities laws. Therefore, the core of its judgment lies in how to objectively define "whether the buyer's profit expectation is reasonable." To this end, the SEC has established a systematic review framework to assess the issuer's statements and commitments as follows: 1. Source of the commitment: The buyer's reasonable expectation must be based on a management commitment made directly by the issuer or by another party on behalf of the issuer and clearly communicated to the buyer. Conversely, if the profit expectation stems solely from promotion by an unrelated third party (e.g., fervent supporters of a specific crypto ecosystem, ordinary token holders, etc.), then such an expectation is not legally reasonable. 2. Timing of Commitments: To effectively shape and anchor buyer expectations, an issuer's statements or commitments must be communicated before or simultaneously with an offer or sale to buyers. Conversely, if an issuer makes supplementary statements or commitments after a sale has been completed, even if they are very detailed, they cannot transform a previously completed non-securities sale into an offer or sale for an investment contract. 3. Methods of Communicating Commitments: In the new rules, the SEC has clearly listed a series of media for communicating commitments and explicitly stated that when an issuer communicates commitments through such media, investors' profit expectations are considered reasonable. Specifically, this includes: (1) written or oral agreements; (2) regular public communications established by the issuer, such as the issuer's official website and official social media accounts; (3) direct private communications: targeted communications between the issuer and the purchaser; (4) publicly filed documents: regulatory disclosure documents disclosed by the issuer to the purchaser; and (5) issuer attribution documents. leaf="">：Explanatory documents that clearly belong to the issuer (e.g., project white paper).

In addition, the SEC further pointed out that if it is outside such official or regular channels, the reasonableness of the purchaser's expectations will be subject to more stringent scrutiny. Other review factors include:(1) Whether the commitment will be widely disseminated; (2) The specific means of communication of the commitment; (3) The issuer's past communication practices. 4. Content and Clarity of Commitments: When an issuer explicitly states the management efforts it will undertake, provides a detailed business plan sufficient to demonstrate its ability to fulfill its commitments (including specific development milestones, timelines, staffing, and funding sources), and clearly explains how token holders will benefit from these projects, these commitments are highly likely to be legally recognized as constituting "reasonable profit expectations" because they address the core elements of a project's success or failure. Conversely, if the commitments are vague and lack executable resource coordination and financial planning, they are usually insufficient to support investors' reasonable expectations. The establishment of the aforementioned binding rule system effectively objectifies subjective expectations, thereby penetrating potential information asymmetry barriers and reducing the ambiguity of judgment standards. Simultaneously, given that investors' investment needs heavily rely on the issuer's management behavior, once the aforementioned binding relationship is established, regulatory agencies can legally compel issuers to fulfill their information disclosure obligations, thereby preventing fraud and protecting vulnerable investors. 3. The Establishment of the "Separation Rule" In this new regulation, the SEC has made a groundbreaking breakthrough by creating the "separation rule." The core theory of this rule is that: Non-securities crypto assets are not necessarily always securities. Even if they are initially offered as part of an investment contract, under certain conditions, they can be "separated" from the investment contract and thus escape the continuous jurisdiction of securities laws.

The core criterion for determining the separation throughout the rule remains "the reasonable expectations of the purchaser". The SEC believes that, based on the Howe test: (1) As long as investors can reasonably expect to profit from the issuer's "substantial management efforts", the crypto asset continues to be subject to the investment contract; (2) Once such expectations cease or are extinguished, the association between the asset and the contract is dissolved, and separation occurs. Regarding the aforementioned separation criteria, the SEC has clarified two specific scenarios that trigger separation, corresponding to the "success" and "failure" of a crypto project: 1. Project Success: The issuer has fulfilled its representations or commitments. The SEC believes that when the issuer successfully fulfills its substantial management efforts as stated in its representations or commitments (e.g., completing the development of core functions outlined in the white paper, achieving key software milestones, or fully open-sourcing the relevant code), the necessary conditions of the investment contract no longer exist. Because the core work has been completed, investors no longer rely on the issuer's future management efforts to profit. At this point, regardless of whether the crypto assets under the investment contract are delivered immediately or at a later date, the crypto assets will be legally separated from the investment contract and become independent assets not governed by securities laws. 2. Project Failure: Issuer Fails to Fulfill Representations or Commitments. Conversely, the SEC believes that separation will also occur if a project fails. When an issuer encounters funding shortages, technical bottlenecks, or mismanagement, and publicly announces the abandonment of the development of the crypto system, or after a long period of time without any progress, investors will clearly realize that the issuer is no longer capable or intends to fulfill its commitments. In this situation, the reasonable expectation of profit is completely shattered, the investment contract ceases to exist, and the crypto asset is separated. For a long time, both regulators and practitioners have held the ingrained mindset of equating tokens with securities. However, the creation of the segregation rule represents a significant conceptual breakthrough. It acknowledges the technological neutrality of crypto assets, thus precisely targeting regulation towards "financing activities and commitments," rather than the technological vehicle itself. This points the way for the Web3 industry to develop a path of "securitization financing first, then commercialization and circulation." 4. Legal Liability Risks and Compliance Recommendations In this new rule, the SEC also emphasizes that the segregation rule is not a basis for exempting issuers from prior legal liabilities. Specifically: First, if the issuer did not register or obtain an exemption in accordance with the law when initially issuing the investment contract, even if the crypto assets are subsequently separated, the issuer will still bear the corresponding legal responsibility for the initial illegal issuance. Second, if the issuer made significant false statements such as exaggerated publicity or concealed risks during the project's progress, the issuer will still bear corresponding legal responsibility even if the project ultimately fails and the assets have been separated. In view of the aforementioned legal liability risks, in order to clearly define the duration of investment contracts and manage investors' reasonable expectations, the SEC further recommends that issuers, when marketing and promoting,: First, clearly define the scope of their efforts. First, it should provide a detailed and clear overview of the substantive management actions the issuer intends to undertake; second, it should set a timetable, providing a specific timeline and milestones for completing these actions; third, it should make its resource status transparent, explaining the funds and resources required to complete the project; and fourth, it should publicly disclose the progress. That is, it should make public disclosure upon completion of the substantive management actions.