The Securities and Exchange Commission’s Division of Corporation Finance says broad token-holder participation alone does not establish central control, clarifying one factor in the division’s digital-commodity analysis.
The updated FAQ, dated Nov. 2, separates two questions. Whether participants amount to a group depends on the facts, including whether holders have a separate agreement, arrangement or shared understanding to coordinate beyond taking part in governance. That inquiry also covers any separate understanding to act together through delegated authority. Unaffiliated holders without such separate coordination generally are not treated as a group simply because they participate in governance.
The group test also applies when an organization, association or foundation hosts governance and ownership of the system’s native crypto asset determines who may participate. Group status by itself is insufficient: participants must also have operational, economic or voting control of the system to meet the central-party definition.
For a process to qualify as broad-based, it must be transparent and rules-based, involve a wide and varied set of stakeholder types, and let them contribute independently toward consensus or a binding agreement. The FAQ says authority cannot be concentrated, directly or indirectly, in one stakeholder or in an affiliated or coordinated group.
The FAQ lists circumstances in which a central party may oversee participation. Examples include unilateral authority to control system access; change voting procedures for upgrades, protocol changes or distributions; determine who validates transactions; alter code; reverse transactions; or revoke access. Staff generally would not view a party as overseeing participation when every material part of ongoing operation runs automatically under rules-based code without human discretion. If material aspects still require discretionary decisions, that treatment applies only when those decisions are made solely through broad-based governance and its participants are not themselves a central party.
The Division of Corporation Finance says its answers express staff views, carry no legal force, do not change the law and have not been approved or disapproved by the Commission. The governance-group interpretation applies only to the FAQ’s Section III discussion of digital commodities. It has no relevance or application to group-related definitions or provisions under the Securities Act or the Exchange Act.
