Security-Classification Defense

A security classification defense is the set of design, distribution and conduct choices a team makes so that, if a regulator or a court runs the Howey analysis on its token, the record supports a non security reading. It is built into the mechanism and the communications, not written into a disclaimer. No combination of choices settles the question, because the analysis is fact specific and runs transaction by transaction. The choices decide which facts exist to be read.

Nothing in this discipline produces a safe harbor, and any page telling you otherwise is selling something. The defense is a record: what the network could do on the day tokens went out, whose work holders depended on afterwards, and what the team said in public the entire time.

What the record has to show

The SEC's 2019 staff framework lists the facts cutting hardest against reliance on the efforts of others, and therefore against security status. The network and the asset are already fully developed and operational at distribution rather than sold on a promise. No identifiable active participant performs the essential managerial work the value depends on. Holdings and governance are not concentrated enough for a promoter to steer value. And the marketing does not emphasize price appreciation or trading.¹

One caution travels with that document, and it is printed on it. This is staff guidance, explicitly not a rule, not a regulation, not a Commission action.¹ It tells you how a staff attorney reasons. A judge applies Howey.

Disclaimers are not a lever

The framework disposes of the drafting answer directly: disclaimers alone are not dispositive, because the analysis follows economic reality and the conduct of issuer and purchasers rather than the offering documents.¹ A clause saying the token is not an investment does not survive a founder posting about listings.

SEC v. LBRY is the version of this with a number attached. In November 2022 the District of New Hampshire granted the SEC summary judgment, holding that LBRY offered and sold LBRY Credits in violation of Section 5 of the Securities Act and rejecting its fair notice defense. On 11 July 2023 the court ordered a $111,614 civil penalty and a permanent injunction.² LBRY said it would not appeal and would shut down, with assets placed in receivership.³

Why conduct after the sale counts

The doctrinal point founders miss is where the court looked. The Howey analysis relied in part on LBRY's marketing and public statements encouraging speculation, made after distribution, not only on the promises in sale time paperwork. The economic reality inquiry reaches conduct, and conduct continues after the wire clears.

In our view that makes a classification defense a maintained position rather than a launch artifact. A team can hold a clean record for a year, then hand a regulator the missing element in one thread about price. The communications policy is part of the design, and it binds founders, not only the marketing function.

What we actually change at design time

Across the 100+ projects the firm has worked on, the same few levers do the work, and each costs less before a raise. Does the token carry a claim on protocol revenue or profit? Does the design market a yield expectation at the token layer? Does anything on the network function on distribution day, or is the buyer holding a roadmap? Do unilateral upgrade and treasury authority have a written end condition and a named triggering event, rather than an intention? And does the product generate revenue if the token does not exist?

That last one is the test we lean on hardest, because founders cannot argue past it. If the token is the only way anyone pays for the product and the team holds a large allocation, the team profits materially from adoption, and two Howey prongs are visible in the basic economics before a lawyer opens the file. Fixing it means either the token is not the exclusive payment path, or the team allocation is not material. Both are spreadsheet decisions.

How the defense fails

Three ways, in the order we see them. Strong paperwork paired with loose conduct, where the offering documents and the founder's public account describe different products. A defense built at raise time and never revisited, so the airdrop eighteen months later goes out with nobody rerunning the analysis. And a team treating one lever as sufficient, when a utility argument does not survive a revenue share sitting next to it.

Whether a specific token, design or distribution is a security is fact specific and jurisdiction specific, and that call belongs to your counsel. Nothing here makes any outcome more or less certain. This page is reference material. It is not legal advice, and it is not a recommendation to buy, sell, or hold any asset.

Common questions

Can a token be designed so it is not a security?

No design settles the question, because the Howey analysis is fact specific and runs on each transaction rather than on the asset. What design does is decide which facts exist. A network that functions at distribution, no claim on revenue, no promoter whose essential efforts the value depends on, and marketing that does not stress price appreciation all cut against security status under the SEC's staff framework.¹ Classification remains a question for counsel.

Do disclaimers protect a token from being called a security?

Not on their own. The SEC's 2019 staff framework states that disclaimers alone are not dispositive, because the analysis follows economic reality and the actual conduct of the issuer and purchasers rather than the language in the documents.¹ In SEC v. LBRY the court's reasoning drew on the company's own public statements encouraging speculation, made after distribution, not only on the sale paperwork.

What happened in the LBRY case?

The District of New Hampshire granted the SEC summary judgment in November 2022, holding that LBRY had offered and sold LBRY Credits in violation of Section 5 of the Securities Act, and rejected the company's fair notice defense. On 11 July 2023 the court imposed a civil penalty of $111,614 and a permanent injunction against further registration violations.² LBRY said it would not appeal and would shut down, with assets placed in receivership.³

See Tokenomics Design and Classification Strategy for how this applies in practice.

Sources

Framework for Investment Contract Analysis of Digital Assets
U.S. Securities and Exchange Commission, Strategic Hub for Innovation and Financial Technology, 2019
Staff guidance of 3 April 2019, explicitly not a rule, regulation or Commission action. Source of the fully developed and operational network factor, the active participant analysis, and the point that disclaimers alone are not dispositive. The sec.gov host rejects automated clients; the page is live.
SEC v. LBRY, Inc., Litigation Release No. 25775
U.S. Securities and Exchange Commission, 2023
November 2022 summary judgment for the SEC in the District of New Hampshire, and the 11 July 2023 remedies order imposing a $111,614 civil penalty and a permanent injunction. The sec.gov host rejects automated clients; the page is live.
Statement on SEC v. LBRY, Commissioner Hester M. Peirce
U.S. Securities and Exchange Commission, 2023
Confirms LBRY announced it would not appeal the district court decision and would shut down with assets placed in receivership. A Commissioner's individual statement, not Commission action.

Last reviewed 2026-08

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