SEC Staff: Maintenance and Upgrade of Functional Networks Generally Do Not Constitute Core Management Efforts Under Howey
Staff of the U.S. Securities and Exchange Commission stated that maintaining and upgrading an operational cryptocurrency network generally does not constitute "necessary management efforts" under the Howey test.
The Howey test determines whether an investment contract exists based on whether the purchaser has a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Staff have adopted the court's interpretation, limiting "necessary management efforts" to actions that are sufficient to determine the success or failure of the enterprise, excluding administrative, transactional, and technical operations. Maintenance of protocols, code fixes, and routine upgrades on functional networks are categorized as the latter.
The SEC's March 2026 interpretive document defines digital commodities as those whose value comes from the programmed operation of functional cryptocurrency systems and supply and demand, rather than from the profit expectations based on the necessary management efforts of others, explicitly listing native tokens such as Bitcoin, Ethereum, Solana, and XRP. The document also states that efforts to promote network effects, incentivize developers, and build ecosystems are excluded from "necessary management efforts" in three footnotes.
Investment contracts can terminate with the fulfillment or failure of commitments: if the issuer completes the necessary management efforts of its commitments or fails to deliver, the purchaser no longer expects profits based on the efforts of others, separating non-securities crypto assets from investment contracts. The trigger point remains whether the issuer has made sufficiently specific and enforceable management commitments, rather than whether the network is still upgrading.
Earlier staff statements classified solo mining, mining pools, self-staking, and certain custodial staking as administrative activities that do not constitute securities offerings. This interpretation extends the same logic to the ongoing maintenance of functional networks.
In market mechanisms, funding shifts from the enforcement premium of "the team is still building, so the tokens are securities" to commodity trading and derivatives of functional networks. Buyers are market makers and institutions trading native assets on spot, perpetual, and tokenized tracks; sellers are non-functional projects that still rely on roadmaps and treasury narratives to maintain their securities status. The event-driven aspect comes from the interpretive document separating assets from transactions: assets can be commodities, and the management commitments at the time of issuance can still constitute investment contracts. Beneficiaries are networks that are operational, have no profit rights, and are priced based on protocol operation, while the burden falls on issuers whose valuations are still driven by upgrade commitments.
The public text emphasizes that administrative and technical labor, even if necessary for network operation, does not automatically satisfy the third prong of Howey.
Source: Public Information
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The SEC has long considered "the core team is still developing, upgrading, market-making, and building ecosystems" as evidence for the fourth prong of Howey, from the 2017 DAO report, the 2019 digital asset framework, to Hinman's speech. Under Gensler's tenure, this has led to lawsuits against several exchanges and issuers. From 2025 to 2026, staff first excluded proof-of-work mining, protocol staking, and certain stablecoins from securities offerings, and in March 2026, the committee-level interpretation marked 16 native tokens of functional networks as digital commodities, clarifying that investment contracts can conclude. The notion that maintenance and upgrades do not count as necessary management efforts serves as a technical anchor for this retreat line.
The capital path shifts enforcement risks from the protocol layer back to the issuance layer. Funds can trade functionalized tokens without needing to first prove decentralization, but new issuances with clear roadmaps, milestones, funding plans, and profit explanations may still be treated as investment contracts. Money thus flows to self-operating settlement layers and commodity futures tracks, while legal fees are spent on the document battle over "whether commitments are specific enough." The CFTC has also indicated it will enforce commodity laws under the same framework, creating a dual accounting system.
The analogy is Howey's own citrus orchard: land is not a security, but paired with exclusive management and profit-sharing commitments, it becomes an investment contract; once the orchard is grown and the management contract ends, the land reverts to ordinary assets. In traditional commodity markets, exchanges upgrading matching systems never turn crude oil into securities. The industry is transitioning from an enforcement expansion of "everything is a security" to a phase of categorical control.
Structural changes belong to regulatory changes. The mechanism is to change Howey from a permanent label to a time-limited trading status: the maintenance of functional networks is the system self-operating, not managing a business for holders; only when issuers package upgrades as reliable profit commitments can securities attributes be reapplied. Pricing power thus shifts from enforcement discretion to whether the protocol is operational and whether commitments have been fulfilled.
ABAB News · Cognitive Law
The system is running, maintenance is not management
Securities are attached to commitments, not to protocols
Once classifications are clear, risks return to the issuer's responsibility