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SEC Issues First No Action Letter on Crypto Tokens

On April 3, 2019, the SEC issued its first no-action letter for a crypto token! This is a significant step in providing regulatory clarity for when a token is NOT a security or at least when the SEC will take no action on enforcement. The same day it also issued Framework for “Investment Contract” Analysis of Digital Assets (which we will cover in a separate blog post).

The no-action letter issued to TurnKey Jet, Inc. (TKJ) states that the Division of Corporation Finance will not recommend enforcement action if TKJ offers and sells the tokens as described in TKj’s letter requesting the no-action. Specifically, the no-action letter stated that in reaching its position it focused on the following representations in the letter:

  • TKJ will not use any funds from Token sales to develop the TKJ Platform, Network, or App, and each of these will be fully developed and operational at the time any Tokens are sold;
  • the Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
  • TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;
  • TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;
  • If TKJ offers to repurchase Tokens, it will only do so at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ, unless a court within the United States orders TKJ to liquidate the Tokens; and
  • The Token is marketed in a manner that emphasizes the functionality of the Token, and not the potential for the increase in the market value of the Token.

As typical, the no-action letter concludes with a statement that its position is based on the representations made to the Division in TKJ’s letter. It warned that any different facts or conditions might require the Division to reach a different conclusion and that the response expresses the Division’s position on enforcement action only and does not express any legal conclusion on the question presented.

The proposed TKJ Tokens will operate and be deployed on a private, permissioned, centralized blockchain network and smart contract infrastructure operated by TKJ. TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform. In essence, this sounds like a very closed loop system and it appears the tokens will not be tradeable on public crypto exchanges. While this is a somewhat restrictive use of tokens, it is nevertheless significant that the SEC has issued the no-action letter.

We anticipate that this event will lead to a flurry of activity by others seeking no action letters. Check back as we will provide periodic updates on other significant rulings.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume IX, Number 120
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About this Author

James Mattinson Blockchain Technology and Digital Currency Lawyer Sheppard Mullin Washington DC
Partner

Jim Gatto is a partner in the Intellectual Property Practice Group in the firm's Washington, D.C. office. He is also Co-Team Leader of the firm's Digital Media Industry and Social Media and Games Industry Teams, Blockchain Technology and Digital Currency team, and Team Leader of the firm's Open Source Team. 

Areas of Practice

Mr. Gatto leverages his unique combination of nearly 30 years of IP experience, business insights and attention to technology trends to help companies develop IP and other legal...

202.747.1945
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