The Difference between Flare and Grenade Launchers
Article in progress; still identifying research points
Fundamentally, the difference between a grenade launcher and a flare launcher is 3 millimeters. The barrel of a standard grenade launcher has six grooves of rifling and a 40mm diameter (although it would probably be regarded as a DD even without the rifling). Any device equipped with such a barrel is considered a Destructive Device. A 37mm barrel (which anecdotally seem to mostly be smooth bore) renders the device - with the same fire control group and receiver - a flare launcher..
Specifications of 40mm Barrels
Diameter is 40mm. The barrel twist rate - at least, on the barrels LMT offers - is 1:48". This is an incredibly slow twist rate by rifle standards.
It's not a Grenade Launcher if you Can't Get Grenades
This seems to be the only logic behind why you can own a 37mm launching device built on a military receiver, with absolutely no functional difference from its 40mm counterpart other than the tube diameter.
When a 37mm Launcher Becomes a Destructive Device
ATF is gracious enough to consider 37mm launchers to be signalling devices, for the most part. The exception to this is if you happen to possess anti-personnel rounds intended to be fired from a 37mm tube. The possession of a 37mm beanbag, rubber shot, or beehive round is enough to render your launcher a Destructive Device via constructive possession. The rules of constructive possession do not apply when you do not possess both components; either the launcher or the ammunition is fine to possess on its own. Were you to have registered your 37mm launcher as a Destructive Device, it would not be a crime to use anti-personnel munitions in your launcher.
Obtaining Ammunition in 40mm
In 40mm, a wide range of specialized munitions are available. The first thing most folks think about are high explosive (HE) grenades, commonly used by the military. Each individual grenade is regulated as an NFA item. Specifically, each individual grenade is a Federally-regulated Destructive Device, and would require its own $200 tax stamp to transfer. I may be misreading this, but it would appear that non-explosive munitions (e.g. gas, beanbag rounds, etc) are not Destructive Devices. Reloading equipment also exists for 40mm rounds, however I am presently unclear as to whether an expended 40mm casing would require a new tax stamp to reload with a lethal round. I am presently leaning towards thinking that as long as you're not reloading a grenade, you could reload all the buckshot, flare, gas, etc rounds that you might want.
To FFL or Not to FFL
It seems that whether a flare launcher is a firearm or just an accessory varies with which type of launcher you get. Apparently an M203 receiver is classified as a firearm, and thus must go through a standard transfer process regardless of which diameter tube it's going to be fitted with. However, a Spike's Tactical Havoc launcher is not classified as a firearm, and may be shipped to your door.
Questions to Get Solidly Answered
Multiple manufacturers for flare launchers - M203 builds, then RPB - then there's Spike's - any other popular launchers out there?
What pressures can the 37mm barrels handle? Apparently Spikes' and RPBs wouldn't be able to handle DD duty with projectiles even if registered.
Can a 37mm barrel be rifled for accuracy without triggering NFA status?
Smoothbore 40mm barrels are not DD's?
Are 40mm non-explosive rounds DD's? Leaning towards maybe, depending on classification
Are 40mm anti-personnel rounds DD's? Leaning towards maybe.
Are 40mm smoke/gas rounds DD's? Leaning towards no.
Are 37mm anti-personnel rounds (buckshot, etc) DD's?
Are 37mm less-lethal rounds (beanbags, etc) DD's?
Are there types of ammo which trigger constructive possession if possessed in 37mm?