In a significant step forward for the cryptocurrency industry, the U.S. Securities and Exchange Commission 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.

Click here for the full GT Blockchain & Cryptocurrency Newsletter for Spring/Summer 2019.

 

Tags: blockchain, blockchain industry, blockchain technology, Colorado Digital Token Act, cryptocurrencies, Cryptocurrency, digital assets, digital payment, security token offering
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Photo of Barbara A. Jones Barbara A. Jones

Barbara A. Jones is Co-Managing Shareholder of the firm’s Los Angeles office and a member of the firm’s Global Corporate practice. Barbara serves as Chair of the firm’s interdisciplinary Blockchain & Digital Assets practice. Barbara maintains a diverse corporate and securities law practice

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Barbara A. Jones is Co-Managing Shareholder of the firm’s Los Angeles office and a member of the firm’s Global Corporate practice. Barbara serves as Chair of the firm’s interdisciplinary Blockchain & Digital Assets practice. Barbara maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including private and public financings, dual listings, mergers and acquisitions, strategic collaborations and joint ventures, and licensing transactions. She serves as a trusted advisor to public and private company boards of directors on governance matters and complex regulatory reporting and compliance issues. Barbara’s clients include financial institutions, private equity and venture capital groups, and public and private companies in emerging technology, life sciences and biotechnology, defense and security, blockchain and digital assets, telecommunications, information technology, energy (traditional and renewable), mining, media, entertainment and sports. Barbara also represents Olympic and professional athletes and sports-related organizations.

Barbara practiced U.S. law in London from 1990 through 1997 with Sullivan & Cromwell, LLP, and headed the international capital markets practice of Kirkland & Ellis LLP 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.

Barbara is a past chair of the ABA’s Subcommittee on International Securities Matters. She is a frequent speaker at conferences relating to cross-border securities matters, strategic alternatives, and digital asset structures. She serves on the Government of Bermuda’s Global FinTech Advisory Board.

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Photo of Rebecca G. DiStefano Rebecca G. DiStefano

Rebecca G. DiStefano is a member of the firm’s Global Corporate Practice and Global Securities Practice with deep experience in capital formation matters and securities compliance. She counsels clients in a diverse range of corporate securities, corporate governance and regulatory matters at every

…

Rebecca G. DiStefano is a member of the firm’s Global Corporate Practice and Global Securities Practice with deep experience in capital formation matters and securities compliance. She counsels clients in a diverse range of corporate securities, corporate governance and regulatory matters at every stage of the corporate life cycle from the emerging growth phase to mature companies evaluating exits.

Ms. DiStefano has wide-ranging experience guiding the executive suite at the intersection of capital formation and securities regulatory matters analyzing a range of finance options to help clients pursue their objectives. Ms. DiStefano’s public and private company clients span a variety of industries including real estate, hospitality, financial services, life sciences, energy, manufacturing, fintech and blockchain technology, and resources. She guides firm clients in financing activities such as early seed, angel and venture capital rounds, community investing, liquidity, bridge and growth capital, and including Regulation D Private Placements, Regulation A Qualifications, Regulation CF Crowdfunding, Registrations, as well as attendant continuing disclosure requirements, periodic reporting and corporate governance matters.

Ms. DiStefano’s clients are often private companies preparing to become public companies or planning for a significant growth phase. She regularly represents clients before the Securities and Exchange Commission and state securities agencies. She has served on the firm’s interdisciplinary Blockchain Task Force since 2017.

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