The SEC’s recent cryptocurrency directives remain lacking in clarity.

The regulatory agency’s reset is genuine, yet the updated information falls short of the comprehensive course adjustment the industry requires, according to Gibson Dunn attorneys.

On Tuesday, March 19, the SEC released joint guidance alongside the CFTC to provide definitive clarity regarding the application of securities laws to digital assets. In several areas, including staking and meme coins, the SEC’s updated guidance represents a positive change and a notable departure from the Gensler administration. It also appropriately recognizes that the agency’s previous “regulation by enforcement” strategy under Chair Gensler had obscured compliance responsibilities and hindered the industry. However, in critical respects, the guidance does not achieve the comprehensive course correction the crypto sector requires.

The primary limitation lies in the SEC’s formulation of the Howey test for “investment contract” securities. There is a consensus that most digital assets, in isolation, do not qualify as investment contracts. Even the Gensler SEC (eventually) acknowledged this point, and the SEC’s new guidance reiterates this stance. The crucial question, however, is when a digital asset is sold as part of an investment contract, thereby bringing the sale under the jurisdiction of securities laws.

The statute provides clarity. Based on the text, historical context, and common understanding, an “investment contract” refers to a contract – a direct or implied agreement between the issuer and the investor wherein the issuer commits to deliver ongoing profits in exchange for the investor’s funds. Most digital assets do not constitute investment contracts because they lack contractual nature. A digital asset might be associated with an investment contract (like any other asset), but it can still be sold independently from that investment contract without triggering securities laws. In the lawsuits initiated by Gensler, crypto firms vigorously defended this correct interpretation of the law.

Nonetheless, the SEC’s new guidance does not address whether an investment contract necessitates contractual obligations. Instead, it asserts that an investment contract is associated with a digital asset (at least temporarily) when the “facts and circumstances” indicate that the digital asset developer “induc[ed] an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts,” leading buyers to “reasonably expect to derive profits.” This does not definitively confirm a clear separation from the SEC’s previous position that Howey disregards “contract law” and demands “a flexible application of the economic reality surrounding the offer, sale, and entire scheme at issue, which may encompass a range of promises, undertakings, and corresponding expectations.”

The Gensler SEC’s subjective approach to Howey was particularly concerning. It permitted the agency to construct an “investment contract” from various public communications by digital asset developers — tweets, white papers, and other promotional content — even in the absence of explicit promises from the issuers. Moreover, it failed to differentiate between securities and collectibles like Beanie Babies and trading cards, whose value is largely dependent on the creator’s marketing and efforts to create scarcity. The SEC overlooked a significant opportunity to categorically reject that method and reaffirm a crucial statutory distinction between assets and securities — a contract.

The SEC still has the chance to rectify this situation, but it will require further clarification on how the agency plans to apply Howey moving forward — and to decisively distance itself from Gensler’s overly broad interpretation of securities laws. For instance, the Gensler SEC frequently referenced various “widely distributed promotional statements” to justify categorizing a digital asset as an investment contract. The SEC’s updated guidance introduces some constraints on this tactic by stipulating that a developer’s representations or promises must be “explicit and unambiguous,” include “sufficient details,” and occur prior to the acquisition of the digital asset. Yet, even this improved framework allows for excessive interpretation. It could be broadly interpreted by private plaintiffs, the judiciary, or a future SEC. Instead of continuing along the path previously taken by Gensler, the SEC should clarify that mere public statements affecting value are inadequate and that promises and representations must be contextualized within the specific transaction at hand — not derived from whitepapers or social media posts that many buyers likely did not consider.

Moreover, the SEC ought to clarify its stance on secondary-market trading. Encouragingly, the agency now acknowledges that digital assets are not investment contracts “in perpetuity” solely because they were once “subject to” investment contracts. However, the agency also asserts that digital assets remain “subject to” investment contracts traded on secondary markets (such as exchanges) as long as buyers “reasonably expect” issuers’ “representations and promises to remain connected” to the asset. The SEC provides little insight on how to evaluate those reasonable expectations, offering only two “non-exclusive” examples of when an investment contract “separates” from a digital asset. Additionally, it does not address whether a secondary-market buyer must have a contractual relationship with the token issuer, leaving it ambiguous whether the SEC has genuinely moved away from the Gensler-era perspective that investment contracts “travel with” or are “embodied” by crypto tokens.

Rather than conveying such mixed messages, the SEC should implement substantial limitations on the application of securities laws to secondary-market transactions by adopting Judge Analisa Torres’s approach in Ripple. Judge Torres recognized that it is unreasonable to infer an investment contract in the context of “blind bid-ask” transactions — that is, transactions where the parties do not know each other’s identities (as is typical in secondary-market trading). Given that buyers are unaware whether their funds are directed to a token’s issuer or an unknown third party, they cannot reasonably expect that the seller will utilize the buyers’ money to generate and deliver profits. The SEC should explicitly endorse Judge Torres’s analysis.

These matters are not merely academic concerns. The current SEC might not interpret or enforce its new guidance in a manner that jeopardizes the viability of the crypto sector within the United States. However, by failing to unequivocally reject the excesses of the Gensler administration, the SEC’s revised guidance leaves the industry vulnerable to a future SEC that could exploit ambiguities in the current guidance to resume regulation by enforcement. Private plaintiffs could attempt to do likewise in lawsuits against key industry players (such as leading exchanges). In the meantime, the SEC’s interpretations could distort the baseline of securities law during discussions regarding market-structure litigation.

The SEC has invited feedback on its guidance, and the industry should respond. The SEC deserves acknowledgment for its improvements. However, the industry should not hesitate to point out the persistent flaws and uncertainties in the agency’s approach and advocate for clear, meaningful, and lasting constraints to ensure regulatory clarity and stability. Simply refreshing the legal framework of the previous enforcement initiative is insufficient.