Why 'Common Enterprise' Is the SEC's Next Legal Battleground

The SEC is no longer relying solely on token sales. It's now arguing that protocol governance, staking rewards, and treasury management create a de facto common enterprise. This turns decentralized coordination into a legal liability.

• Target: DAOs and staking-as-a-service providers.
• Precedent: The LBRY and Terraform Labs cases expanded this definition.
• Risk: Successful prosecution here could classify most active Layer 1s and DeFi protocols as securities.

Projects must architect to disprove 'common enterprise.' This means minimizing centralized development promises and building credibly neutral infrastructure.

• Model: Emulate Bitcoin and Ethereum's post-merge stance—no entity promises profits.
• Tactic: Decouple foundation from protocol; use trustless multi-sigs like Safe{Wallet} for treasury.
• Execution: Document all governance decisions as user-driven, not management-driven.

The SEC's case against Coinbase and Kraken staking services sets a dangerous precedent. It argues that staking rewards constitute a security because they are derived from the managerial efforts of the protocol.

• Target: Centralized exchanges and liquid staking tokens (Lido's stETH, Rocket Pool's rETH).
• Mechanism: Rewards are framed as dividends from a common enterprise.
• Exposure: $50B+ in total value locked in liquid staking derivatives is now in the crosshairs.

Mitigate risk by architecting staking where users retain sole control and rewards are algorithmic, not discretionary.

• Blueprint: Rocket Pool's decentralized node operator network.
• Requirement: No central entity controlling funds or setting reward rates.
• Verification: Use EigenLayer's cryptoeconomic security or similar trust-minimized designs.

Large foundation-controlled treasuries used for grants and incentives are being framed as a pool of capital from which investors expect profits. The SEC views developer grants and liquidity mining as promotional efforts that fuel the common enterprise.

• Target: Major Layer 1 foundations like Solana, Avalanche, and Polygon.
• Evidence: Public roadmap updates and grant announcements become exhibits.
• Scale: Billions in ecosystem funds are now potential evidence of managerial control.

Convert the foundation from an active manager to a spent force. Use retroactive public goods funding models and on-chain voting for all allocations.

• Model: Adopt Optimism's RetroPGF or Gitcoin Grants framework.
• Action: Burn or permanently lock a majority of the treasury after initial decentralization.
• Proof: Maintain a public ledger showing zero discretionary spend post-launch.

Protocols with a centralized foundation controlling a $100M+ treasury and funding development are painting a target on their back. The SEC argues this creates a single, dependent enterprise where token value is tied to the foundation's managerial efforts.

• Key Risk: Direct funding of core devs from treasury.
• Key Risk: Foundation-led roadmap and governance proposals.
• Mitigation: Move to fully permissionless, grant-based funding like Optimism's RetroPGF.

Centralized staking services and protocol-native staking with promised yields are low-hanging fruit. The SEC's case against Kraken established that offering returns from a pool of assets can be an investment contract.

• Key Risk: Marketing token staking as an income-generating product.
• Key Risk: Lido (LDO) and similar pooled staking derivatives.
• Mitigation: Pure Delegated Proof-of-Stake (DPoS) where rewards are protocol inflation, not a profit share.

Tokens whose sole utility is governance over a profitable, centralized service are exposed. If the token doesn't enable the core protocol function (e.g., Filecoin for storage, Helium for coverage), it's just a speculative bet on the team's success.

• Key Risk: Token is not technically required for network operation.
• Key Risk: Uniswap (UNI) as the canonical example of a 'non-essential' governance token.
• Mitigation: Fee switch activation that directly ties token value to protocol cash flows.

Projects that conducted a private sale to VCs with promises of future exchange listings and ecosystem development have already created a common enterprise. Public token distribution is often just a liquidity event for insiders.

• Key Risk: SAFTs (Simple Agreements for Future Tokens) are explicit investment contracts.
• Key Risk: VC vesting schedules that align token success with managerial efforts.
• Mitigation: Fair launches, liquid bonding curves, or worker token models like Threshold Network.