Why Secondary Market Sales Offer No Regulatory Safe Harbor

Regulators argue the smart contract code and tokenomics constitute the common enterprise. Secondary sales are not independent transactions; they are the continuous execution of the original, unregistered scheme.\n- Key Precedent: SEC v. LBRY established that secondary market sales can satisfy Howey, even without a direct issuer-promoter.\n- Key Risk: Every DEX swap or AMM liquidity provision is a potential 'sale' under this expanding theory.

The only viable defense is proving the token is a consumptive good, not an investment. This requires utility that is impossible to separate from the token itself and is not speculative.\n- Key Example: Ethereum for gas. The asset's primary use is paying for computation; its value is derived from network demand, not promoter efforts.\n- Key Metric: >50% of token activity should be non-speculative (e.g., staking for security, governance votes, paying fees).

The SEC's case against Coinbase hinges on the argument that the continuous development of the protocol by a core team constitutes the 'efforts of others' that drive profit expectation. Staking-as-a-service amplifies this claim.\n- Key Enforcement: SEC v. Ripple partial loss: Institutional sales were securities; programmatic sales were not, creating a false sense of safety.\n- Key Takeaway: A decentralized, immutable protocol with no ongoing development is the only clear path, a bar almost no top-100 asset meets.

The SEC's analysis focuses on the economic reality, not the venue. A token sold in a secondary market can still be an investment contract if buyers expect profits from the managerial efforts of a common enterprise.

• Key Precedent: The SEC v. Telegram case established that initial purchasers' resale into a secondary market can fulfill the 'common enterprise' requirement.
• Key Risk: The Reves 'Family Resemblance' Test for notes can also apply, where factors like trading for speculation weigh heavily against a token.

Projects often claim a token is a commodity post-launch, but the SEC consistently rejects this as a self-serving legal conclusion.

• Key Reality: The DAO Report and subsequent actions show the SEC views most tokens as securities at inception, with the character persisting.
• Key Precedent: In SEC v. Ripple, the court ruled institutional sales were securities, while programmatic sales were not—a nuanced, fact-specific ruling that offers no blanket safe harbor.

If a token is deemed a security, every intermediary in the trading stack becomes liable for operating as an unregistered exchange, broker, or clearing agency.

• Key Consequence: This creates a regulatory domino effect, impacting Coinbase, Binance, Uniswap (as argued in the Wells Notice), and even decentralized liquidity pools.
• Key Risk: The SEC's 'Catch and Kill' strategy uses secondary market trading as evidence of an ongoing securities offering, ensnaring the original team years later.

Secondary market prices are often driven by project announcements, upgrades, and staking rewards—all direct managerial efforts. This reinforces the investment contract analysis.

• Key Evidence: Active developer governance, treasury management, and roadmap execution are cited by the SEC as creating profit expectation.
• Key Reality: Merely listing on an AMM like Uniswap does not break this reliance; it amplifies it by providing liquid markets for speculation.

U.S. regulatory ambiguity creates a false sense of security for projects based offshore, but the long arm of U.S. law reaches global exchanges serving U.S. persons.

• Key Tactic: The SEC uses the 'conduct and effects' test to claim jurisdiction over foreign issuers if actions occur within or significantly affect the U.S. market.
• Key Risk: This creates asymmetric enforcement, where U.S. investors may be made whole while international holders are left with worthless, delisted tokens.

The lack of a safe harbor forces all serious projects into one of three paths: fight the SEC in court, pursue a costly registration (like Prometheum), or geo-block U.S. users and accept a smaller market.

• Key Result: This stifles U.S. innovation, pushing development to jurisdictions with clearer rules like the UAE or Singapore.
• Key Irony: The policy goal of investor protection is undermined by forcing retail to access markets through unregulated offshore entities with higher counterparty risk.

The legal character of a token is set at issuance, not by subsequent trading. If initial sales involved promises of managerial effort or a common enterprise, it's a security forever in the SEC's view.\n- Key Precedent: SEC v. Telegram (TON) halted a $1.7B offering despite planned secondary trading.\n- Builder Implication: Structuring a future airdrop or ecosystem fund can still create an 'investment contract' at T=0.

A truly decentralized network where no single entity provides essential managerial efforts can transition an asset out of security status. This is the 'sufficient decentralization' argument from the 2018 Hinman Speech.\n- Key Benchmark: Can the network function and grow without the founding team's active development and promotion?\n- Investor Risk: Betting on teams that centralize control (e.g., via multi-sigs, treasury control) increases regulatory tail risk permanently.

Under Chair Gary Gensler, the SEC has taken an expansive view, arguing most tokens (excluding Bitcoin) are securities due to their fundraising origins. Secondary markets like Coinbase and Binance are targeted as unregistered securities exchanges.\n- Enforcement Reality: Actions against Ripple, Coinbase, and Kraken show the theory in practice.\n- Strategic Takeaway: Assume your L1/L2 token is a security at launch. Plan legal strategy (Reg D, Reg S) or architectural decentralization from day one.

Proactive steps to reduce secondary market liability exposure for your protocol and its investors.\n- Document Everything: Publish clear disclaimers that tokens are for utility, not investment. Curb promotional hype.\n- Cede Control: Sunset admin keys, decentralize governance to a broad DAO, and fund development via a foundation grant model.\n- Legal Wrappers: Explore Regulation D 506(c) for accredited investors or Regulation S for offshore sales before any public liquidity.