Published April 3, 2019, the SEC’s “Framework for ‘Investment Contract’ Analysis of Digital Assets” represents the most comprehensive staff guidance on token classification ever issued by the Commission. The 14-page document, produced jointly by the Division of Corporation Finance and the Strategic Hub for Innovation and Financial Technology (FinHub), identifies over 30 discrete factors organized under the Howey test prongs that staff considers when evaluating whether a digital asset offering constitutes a securities transaction.
Genesis of the Framework
The 2019 Framework emerged from two years of intensive SEC engagement with the digital asset industry following the 2017 ICO boom. The Commission’s July 2017 DAO Report established that tokens could be securities; the Framework attempted to provide more granular guidance on when they would be.
The document was released simultaneously with the SEC’s first digital asset no-action letter — granted to TurnKey Jet, Inc. — creating a package of guidance that attempted to give market participants positive and negative examples of securities classification. The 2019 Framework now exists alongside Chairman Atkins’ November 12, 2025 Project Crypto, which includes a formal token taxonomy anchored in Howey investment contract analysis, and the March 2026 SEC-CFTC joint token taxonomy guidance, in which Atkins stated that most crypto assets should not be considered securities outright — signaling a narrowing of the Framework’s broad classification approach. The SEC brought 125 cryptocurrency-related enforcement actions between 2021 and 2024 based substantially on this Framework’s analysis, generating $6.05 billion in penalties according to Cornerstone Research, before that pace crashed to just 13 actions in 2025 (a 60% decline).
Importantly, the Framework is a staff statement, not a Commission rule or regulation. It does not carry the force of law and does not bind the Commission or federal courts. However, courts have referenced the Framework in their analysis, and the SEC’s Division of Enforcement has used it as an analytical roadmap in subsequent enforcement actions.
Factor-by-Factor Analysis
Reliance on the Efforts of Others
The Framework devotes the most extensive analysis to this prong, identifying it as the primary battleground for digital asset classification disputes. Staff examines whether:
An Active Participant (AP) exists — defined as a promoter, sponsor, or other third party that provides essential managerial efforts affecting the success of the enterprise. The Framework introduces this term specifically for the digital asset context, recognizing that token projects may have multiple entities performing different functions.
The AP retains meaningful responsibilities post-launch. If the development team continues to make technical decisions, manage the network, or allocate resources after token distribution, this weighs toward securities classification. The Framework specifically examines whether the AP is responsible for the network’s development, improvement, operation, or promotion.
Token holders cannot exercise meaningful control. If governance is concentrated in the development team rather than distributed among token holders, the “efforts of others” prong is more likely satisfied. The Framework notes that merely having a governance token does not establish decentralized control if the founding team retains veto power or controls a majority of voting tokens.
The AP’s efforts are “undeniably significant.” Borrowing from SEC v. Glenn W. Turner Enterprises, the Framework examines whether the AP’s contributions are the primary driver of the enterprise’s success, as opposed to external market forces or the independent efforts of token holders.
Reasonable Expectation of Profit
The Framework identifies several categories of factors under this prong:
Capital appreciation expectations. Staff examines whether the digital asset can be traded on secondary markets, whether it was offered at a discount to future expected value, whether marketing emphasized potential returns, and whether the offered quantity exceeds reasonable personal use.
Participation in earnings or distributions. Some tokens entitle holders to a share of revenue, staking rewards, or other economic benefits that function as dividends. The Framework treats these features as strong indicators of profit expectation, particularly when combined with secondary market tradability.
The role of market dynamics. The Framework acknowledges that any asset can appreciate in value due to supply and demand, but distinguishes between appreciation driven by an AP’s efforts (which supports securities classification) and appreciation driven by external factors like general market conditions (which may not).
The “Sufficiency” Factors
The Framework introduces factors that may indicate a digital asset is less likely to be a security, providing crucial guidance for projects seeking to avoid classification:
The network is fully functional. If purchasers can immediately use the token for its intended purpose — rather than waiting for the AP to complete development — this weighs against securities classification.
The token is designed for consumptive use. Tokens that function as access keys, payment mechanisms within a closed ecosystem, or licenses to use specific software present weaker cases for securities classification, particularly if holders can and do use them for their intended purpose rather than holding for appreciation.
Value is not correlated with AP efforts. If the token’s value is pegged, capped, or otherwise not expected to appreciate as a result of the AP’s efforts, the profit expectation prong is weakened.
Transfer restrictions limit speculation. Tokens that cannot be freely transferred, or that can only be transferred within a limited ecosystem, present weaker investment characteristics.
Practical Application
The Framework has been cited in multiple federal court proceedings and SEC enforcement actions since its publication. In SEC v. Kik Interactive (2020), the Southern District of New York referenced the Framework’s factors in concluding that Kik’s Kin token was sold as a security. The court found that Kik’s marketing emphasized potential returns, the token was sold before the network was operational, and Kik retained the primary development role.
In contrast, the Framework’s “sufficiency” factors have been invoked by defendants seeking to demonstrate that their tokens had evolved beyond securities classification. Ripple Labs argued that XRP’s network was fully functional and that XRP holders used the token for cross-border payments rather than investment — arguments that partially succeeded before Judge Torres.
For token issuers, the Framework provides a practical checklist. Projects that can demonstrate operational utility, consumptive use, decentralized governance, and limited profit expectations have the strongest arguments against securities classification. However, the Framework explicitly states that no single factor is determinative, and the overall analysis depends on the totality of circumstances.
Limitations and Criticisms
Legal practitioners have identified several limitations in the Framework:
Lack of bright-line rules. The 30+ factors provide flexibility but create uncertainty. Two reasonable attorneys can reach opposite conclusions applying the same factors to the same token, and the SEC has not provided a scoring methodology or weighting system.
Temporal ambiguity. The Framework suggests that a token’s classification can change over time as the network matures, but provides no guidance on the transition mechanism. When does a development team’s role become sufficiently diminished? How is “sufficient decentralization” measured? These questions, raised by SEC Director Hinman’s 2018 speech, remain unanswered.
Inconsistent application. The SEC’s Division of Enforcement has not always followed the Framework’s analytical structure in its complaints. Some enforcement actions rely heavily on marketing materials and profit expectations while giving limited attention to the “efforts of others” prong — the Framework’s most developed section.
No safe harbor mechanism. The Framework identifies factors that weigh against securities classification but does not establish any safe harbor. Even a token that satisfies every “sufficiency” factor could still be deemed a security if other factors overwhelm the analysis.
Relationship to Subsequent Guidance
The 2019 Framework has been supplemented but not superseded by subsequent SEC statements. Commissioner Hester Peirce’s proposed Token Safe Harbor (first proposed in 2020, revised in 2021) would have provided a three-year grace period for token development — directly addressing the Framework’s temporal ambiguity. The proposal was never adopted.
The SEC’s 2023 Staff Accounting Bulletin No. 121, requiring entities holding crypto assets to record both an asset and a liability on their balance sheet, reflects a different dimension of the Commission’s approach to digital assets but intersects with the Framework’s analysis when evaluating custodial arrangements for security tokens.
For issuers navigating the Framework, the practical path forward involves comprehensive legal analysis under each factor, documentation of utility characteristics, and careful attention to marketing practices. Our Reg D guide and Reg A+ analysis provide compliance frameworks for tokens that may qualify as securities. For a broader regulatory comparison, see our analysis of US vs. EU tokenization frameworks.
The Framework in Enforcement Practice
The Division of Enforcement has used the Framework as an analytical template in subsequent enforcement actions, though not always consistently:
SEC v. Telegram (2020). The Southern District of New York enjoined Telegram’s $1.7 billion Gram token distribution, applying Framework factors including the pre-functional nature of the TON network, Telegram’s central role in development, and marketing materials emphasizing potential returns. The court’s analysis closely tracked the Framework’s “efforts of others” factors.
SEC v. Kik (2020). Judge Hellerstein found that Kik’s Kin token was sold as an investment contract, noting that Kik marketed Kin to investors (rather than users), the Kin network was not operational at the time of sale, and Kik retained control over development — all Framework-identified factors.
SEC v. Ripple (2023). Judge Torres applied Framework factors but reached a split conclusion: institutional sales satisfied the investment contract analysis (purchasers expected profits from Ripple’s efforts), while programmatic sales on exchanges did not (buyers did not necessarily know they were purchasing from Ripple). This bifurcated approach was not contemplated by the Framework.
SEC v. Terraform Labs (2024). Judge Rakoff rejected the Ripple court’s transaction-specific analysis, holding that the manner of sale is irrelevant to the Howey inquiry. The Terraform decision applied Framework factors uniformly across all transaction types, creating a circuit split that will eventually require appellate resolution.
Practical Compliance Checklist
For token issuers seeking to apply the Framework proactively, the following checklist synthesizes the staff’s 30+ factors into actionable compliance considerations:
Before token distribution:
- Ensure the network is fully operational and tokens can be used for their intended purpose immediately upon purchase.
- Structure marketing materials to emphasize utility and consumptive use — never mention investment returns, appreciation potential, or speculative value.
- Limit token supply available for purchase to amounts consistent with personal use, not investment accumulation.
- Document the network’s decentralization status, including multiple independent validators, distributed governance, and open-source development.
Token design:
- Consider restrictions on transferability during the development phase to reduce investment characteristics.
- Avoid features that create passive income streams (staking rewards denominated in the same token, revenue shares, buyback mechanisms).
- Implement pricing mechanisms that are not purely market-driven (fixed pricing, algorithmic pricing tied to utility metrics).
Post-distribution:
- Minimize the development team’s ongoing role and control over the network.
- Transition governance to token holders through genuinely decentralized mechanisms.
- Maintain disclosure of development activities, token holder distribution, and governance decisions.
If the token cannot satisfy these conditions — as is the case for most security tokens representing equity, debt, or fund interests — the issuer should proceed under a registered offering exemption rather than attempting to structure around the Framework.
Framework Reform Proposals
Several reform proposals would supplement or replace the Framework:
Commissioner Peirce’s Token Safe Harbor. The proposed three-year development exemption would allow token teams to develop toward the Framework’s “sufficiency” factors without immediate securities classification — addressing the chicken-and-egg problem that the Framework creates but does not solve.
FIT21 Act. The House-passed legislation would replace the Framework’s factor-based analysis with statutory criteria based on measurable decentralization thresholds, providing the bright-line rules that practitioners have requested since 2019.
Crypto Task Force review. The reconstituted task force has included token classification in its roundtable series, potentially leading to updated or supplementary staff guidance that refines the Framework’s factors based on seven years of enforcement experience and court decisions since its publication.
For FINRA rules applicable to broker-dealers evaluating token classification, see our regulatory guide. For the transfer agent’s role in maintaining compliance records for classified tokens, see our analysis. For the SEC’s official Framework document, see SEC Framework for Investment Contract Analysis.
The Framework remains the most detailed roadmap the SEC has provided for digital asset classification, and despite its limitations, it continues to shape enforcement priorities, court analysis, and issuer behavior across the tokenized securities ecosystem. For platform-specific compliance approaches, review our entity profiles of Securitize, tZERO, and Prometheum. For the Hinman speech that introduced the “sufficient decentralization” concept underlying the Framework’s temporal analysis, see our detailed examination.