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SEC Issues ‘No Action’ Letters Allowing Sales of Utility Tokens

In a significant step forward for the cryptocurrency industry, the U.S. Securities and Exchange Commission (SEC) issued its first “no-action” letter (NAL) to a U.S.-based company using utility tokens created for consumptive use rather than investment. The regulator sent the letter to TurnKey Jet, Inc. (TKJ) on April 3, 2019, agreeing with the Florida-based air charter and air taxi service’s interpretation that the tokens it uses in its token membership program for sale of air charter services via a private blockchain network are not securities. Therefore, the SEC noted, TKJ can use them under certain conditions.

These conditions include:

  • 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 its functionality, and not the potential for the increase in market value of the token.

A second NAL was issued by the SEC on July 26, 2019, to Pocketful of Quarters, Inc., an online video gaming company, allowing the company to issue its “Quarters” to video gamers. The Quarters are described as a “universal gaming token” and an in-game currency having an unlimited supply and fixed price. The conditions outlined in the NAL mirrored those in TKJ while also adding an additional condition that the Quarters could only be exchanged by the game’s developers and influencers (with approved accounts) for ETH at pre-determined exchange rates. The SEC Division of Corporation Finance’s response further provided those developers and influencers with the ability to exchange their Quarters. Developers and influencers must undergo Know Your Customer/Anti-Money Laundering checks on an ongoing basis.

Both NALs indicate that the SEC is willing to allow a token offering to proceed without registration under the Securities Act of 1933, or reliance upon an exemption therefrom, in the narrow circumstances where, among other things, the tokens are limited to use on a particular platform/network/application and have no external transfer capability or trading market. 

See the SEC’s letters to TurnKey Jet and Pocketful of Quarters here and here

©2020 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume IX, Number 213


About this Author

Rebecca DiStefano, Greenberg Traurig Law Firm, Boca Raton, Corporate and Investment Law Attorney

Rebecca G. DiStefano concentrates her practice in the areas of securities regulation, corporate finance, corporate governance, private equity, venture capital, and mergers and acquisitions law. Rebecca counsels public and private companies in areas including angel financing, debt and equity financing, registration of securities under the Securities Act of 1933, registration under the Investment Advisers Act of 1940, continuing disclosure requirements of the Securities Exchange Act of 1934, initial and continued listing of securities on the stock exchanges and electronic...

Barbara Jones, Greenberg Traurig Law Firm, Los Angeles, Private Equity, Corporate and Energy Law Attorney

Barbara A. Jones is a member of the firm’s Global Securities practice group and co-chairs the firm's Blockchain Task Force. She is also co-coordinator of the firm’s interdisciplinary Conflict Minerals Compliance Initiative. Barbara maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including blockchain/cryptocurrency transactions, private and public financings (including ICOs), dual listings, mergers and acquisitions, strategic collaborations and joint ventures, and licensing transactions. Her practice includes serving as a trusted advisor to public and private company boards of directors on governance and complex regulatory reporting and compliance issues. Barbara's clients include financial institutions, private equity and venture capital groups, and companies in blockchain, life sciences and biotechnology, information technology, energy (traditional and renewable), mining, defense and security, telecommunications, media, entertainment and sports. Barbara is also active in the representation of Olympic athletes and sports-related organizations.

Barbara practiced U.S. law in London from 1990 through 2003, and headed the international capital markets practice of a major U.S. law firm from 1999 to 2003 before relocating to Boston. From 1997 to 1999, she served as Vice-President, Assistant General Counsel and Regional Counsel for capital markets with J.P. Morgan Securities Ltd. in Europe, the Middle East and Africa. Since returning to the U.S., she has continued to actively represent public and private companies, private equity groups and investment banks in the European, Scandinavian, African and greater Asian markets, including China.