Why the SEC Views All Legal Wrappers as Temporary Scaffolding

The SEC consistently pierces the veil of legal structures to target the underlying economic reality. A token's label is irrelevant if its promotion, distribution, and use resemble an investment contract.

• Precedent: The Howey Test focuses on investment of money in a common enterprise with an expectation of profits from others' efforts.
• Target: Projects like LBRY and Telegram's TON were pursued despite complex sale structures.
• Outcome: Legal opinions and foreign foundations provide no lasting protection if U.S. investor solicitation occurs.

The SEC rejects the notion that a project can 'launch and leave' to achieve a safe harbor. Their view: if any central party was essential to the creation and initial distribution, the token was a security at sale.

• The Problem: Founders point to Ethereum's perceived decentralization as a goalpost.
• The Reality: The SEC's Hinman Speech was personal opinion, not policy. In practice, they argue initial development and promotion are inherently centralized acts.
• Impact: This makes retroactive decentralization a legally untested and risky defense for any pre-mined or VC-backed token.

In the absence of clear congressional rules, the SEC uses enforcement actions to establish de facto regulation, creating paralyzing uncertainty for builders.

• Strategy: Target high-profile cases (Ripple, Coinbase) to set broad industry precedents through court rulings.
• Effect: Creates a chilling effect where any legal wrapper is seen as a delay tactic, not a solution.
• Result: Forces protocols to choose between crippling settlements or decade-long legal battles, regardless of corporate structure.

The SEC's application of the Howey Test is expanding, targeting not just token sales but the entire protocol ecosystem. Legal wrappers like foundations in Zug or the BVI create a false sense of security.

• Key Risk: The SEC's 'ecosystem' argument can pierce corporate veils, targeting US-based developers and users regardless of entity domicile.
• Key Takeaway: Structural decentralization is the only credible defense, moving beyond mere legal separation to genuine protocol-level autonomy.

Non-profit foundations (e.g., Ethereum Foundation, Solana Foundation) are now primary regulatory targets. Their role in governance and development is cited as evidence of centralized control.

• Key Risk: Foundation-sponsored grants, core development, and treasury management are now liabilities, not assets, under the SEC's 'common enterprise' framework.
• Key Takeaway: Architect for foundation-less operation from day one. Prioritize credibly neutral, on-chain governance and independent, incentivized developer ecosystems.

VC funding rounds and token allocations are Exhibit A for the SEC. The expectation of profit derived from the efforts of a centralized team is the core of the security designation.

• Key Risk: Traditional equity-for-token deals and large, concentrated pre-mines create a permanent regulatory attack surface. The investment itself becomes the violation.
• Key Takeaway: Fund and structure for progressive decentralization. Advocate for fair launches, broad distribution, and governance power that dilutes with network maturity. Your exit must be the protocol's independence.