Investment of Money: The Next Major Battleground in Token Litigation

The SEC argues any asset surrendered for a token constitutes an 'investment', including other cryptocurrencies (e.g., ETH for an ICO) and even user effort/data. This broad interpretation aims to capture pre-sales, ICOs, and certain airdrops under securities law. Recent actions against Coinbase and Telegram hinge on this expansive view.

• Key Risk: Retroactive application to past token distributions.
• Key Tactic: Framing ecosystem participation as a capital contribution.

Protocol teams argue that selling a functional asset for development funds is distinct from pooling capital for a common enterprise with profit expectations. The focus shifts to decentralization and utility post-launch. This defense was central to the Ripple (XRP) partial victory, where programmatic sales were deemed not investment contracts.

• Key Precedent: Ripple ruling on secondary market sales.
• Key Metric: Level of decentralization at time of sale.

Free token distributions were historically seen as avoiding 'investment of money.' The SEC is now targeting airdrops that follow fundraisers or require significant user effort, arguing they are part of a unified scheme to build a speculative ecosystem. The Uniswap Wells Notice signals this new frontier.

• Key Target: Airdrops to early users/testers of pre-funded projects.
• Legal Test: Is the airdrop integral to the capital-raising strategy?

VC investments in SAFTs or token warrants create a clear 'investment of money' paper trail. The SEC uses this to implicate the entire subsequent token distribution, even to public buyers. This creates liability for projects that used standard VC fundraising mechanisms, ensnaring firms like Andreessen Horowitz and Paradigm.

• Key Evidence: SAFT agreements and internal profit projections.
• Structural Flaw: VC round timing vs. public launch timing.

Projects like Ondo Finance and Frax Finance are pioneering models where the treasury funds its own liquidity, severing the direct investment link. Tokens are distributed via retroactive rewards and fee-sharing, not upfront sales. This aligns with the 'consumptive asset' defense by emphasizing utility from day one.

• Key Mechanism: Protocol-owned liquidity pools (e.g., veTokens).
• Legal Shield: No upfront capital raise from public token sale.

Jurisdictions like the UAE and Singapore are crafting explicit, non-securities frameworks for utility tokens. Projects are structuring entities and initial sales offshore to explicitly avoid the U.S. 'investment of money' test. This creates a bifurcated market and pressures U.S. regulators for clarity.

• Key Jurisdiction: Abu Dhabi Global Market (ADGM).
• Strategic Move: Isolated U.S. launch via decentralized frontends.

Passive staking rewards with minimal work or risk are being reclassified as an 'investment contract'. The SEC's actions against Kraken and Coinbase set a precedent that delegating work to a protocol may not be enough.

• Legal Risk: Protocols with >20% APY and 'set-and-forget' mechanics are primary targets.
• Market Impact: $50B+ in staked assets across Ethereum, Solana, and Cosmos could face regulatory scrutiny.
• Builder Focus: Design requires active, verifiable work (e.g., Lido's oracle reporting, EigenLayer AVS validation) to distinguish from passive income.

Shift from capital-based to work-based distribution. Protocols like Helium (HIP-70) and Livepeer reward provable resource contribution (wireless coverage, video transcoding), not mere token locking.

• Legal Defense: Creates a clear 'consumptive use' argument, distancing from the Howey Test.
• Product-Market Fit: Aligns incentives with actual network utility, not financial speculation.
• Investor Signal: Back protocols where >50% of token emissions are tied to verifiable, off-chain work or compute.

Providing liquidity for yield is being framed as investing in a common enterprise. The Uniswap vs. SEC case hinges on whether LP tokens and fee rewards constitute a security.

• Regulatory Grey Zone: Automated Market Makers (AMMs) with $1B+ TVL are in the crosshairs.
• Precedent Risk: A ruling against Uniswap could cascade to Curve, Balancer, and PancakeSwap.
• Builder Imperative: Decouple governance tokens from core fee accrual; emphasize LP's role as active market makers, not passive investors.

Adopt transparent fee-for-service models and aggressive token burns to sever the link between capital deposit and profit expectation. Follow Ethereum's EIP-1559 burn or GMX's esGMX vesting model.

• Legal Clarity: Users pay for a service (swap, leverage); any token burn is a deflationary byproduct, not a promised return.
• Economic Sustainability: Redirects value to token holders via supply reduction, not dividend-like payments.
• Investor Action: Favor protocols where >30% of protocol fees are burned or used for buybacks, creating a clear non-security value accrual.

Retroactive airdrops to early users are being scrutinized as a marketing tool to bootstrap an 'investment contract' community. The SEC's case against Terraform Labs cited airdrops as evidence of a common enterprise.

• Enforcement Trend: Large, indiscriminate airdrops ($100M+ value) with lock-ups are red flags.
• Dilution of Defense: Weakens the 'decentralized network' argument if distribution is seen as a recruitment tool.
• Builder Warning: Avoid airdrops tied to prior financial contribution (e.g., buying NFTs); tie them to provable, non-financial usage.

Design airdrops that reward verifiable, non-speculative network usage. ENS's domain registration rewards and Optimism's retroactive public goods funding are canonical examples.

• Legal Safety: Rewards are for past work (governance, development, content creation), not future investment.
• Community Alignment: Attracts builders and users, not mercenary capital.
• Investor Filter: Prioritize protocols where >75% of initial distribution is allocated to proven contributors, not just token holders.