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.