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Key Takeaways from SEC’s First No-Action Token Letter


April 17, 2019
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In a Recent No-Action Letter, the SEC Issued Long-awaited Guidance Regarding How to Determine if a Digital Asset Constitutes as a Security

The Securities and Exchange Commission (SEC) recently “green-lighted” a charter airline seeking to offer and sell tokens without registration under the Securities Act and the Exchange Act and would not pursue enforcement provided that TurnKey Jet, Inc. (“TKJ”) uses the tokens under specified conditions.  While the SEC initiated numerous enforcement actions against companies pursuing initial coin offerings (ICOs), the crypto industry has been waiting for the SEC to issue its first no-action letter.

In this no-action letter, the SEC issued long-awaited guidance regarding how to determine if a digital asset constitutes a security. A detailed discussion of the SEC’s digital asset framework follows.

Request for No-Action Relief

TKJ’s letter to the SEC proposed to offer and sell blockchain-based digital assets in the form of “tokenized” jet cards.  As described by TKJ’s attorney, a typical transaction would involve a consumer redeeming purchased tokens for air charter services. TKJ tokens would be tied to one US dollar. According to TKJ, its proposed token-based program for prepaid on-demand air charter services would allow for settlement via blockchain, which decreases the settlement time and improves the efficiencies of paying for and obtaining air charter services for both consumers and TKJ.

In its letter, counsel for TKJ applied the test set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946) to demonstrate that the tokens do not constitute an “investment contract” subject to oversight by the SEC. As detailed in prior articles, under the Howey test, an “investment contract” is present where there is: (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits to be derived solely from the efforts of the promoters or third parties. Focusing on the third factor, the letter states:

Consumers will have no right to share in any income generated by the operation of TKJ (or any other affiliated entity). TKJ will not pay dividends, rebates, rewards, interest or other distributions to Consumers from the operation of TKJ. TKJ will make no distribution of any kind to any Consumers, other than the non-monetary provision of the air charter services using the prepaid Token sales funds held in escrow corresponding to the specific Consumers. Further, Consumers will have no reasonable expectation of profit based on capital appreciation… (emphasis added).

SEC’s No-Action Letter Specifies “Conditions”

In its response, the SEC confirmed that it will not recommend that the Commission take enforcement action against TKJ provided it offers and sells the tokens in the manner and under the circumstances described in its letter. As described by Jonathan A. Ingram of the SEC’s Division of Corporate Finance, the no-action relief is contingent upon TKJ complying with the following conditions:

  • 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;
  • Tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
  • Tokens are marketed in a manner that emphasizes the intended functionality of the Token, and not the potential for an increase in the market value of the Token.
  • 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

Key Takeaways

This no-action letter confirms the SEC’s willingness to work with entities seeking to conduct ICOs, under the right facts and circumstances establishing there is no “investment contract” present. While businesses seeking to conduct ICO’s might not always like the answer they receive from the SEC, it is best to ask first, rather than face enforcement action later. For detailed guidance in this still unsettled area of law, we recommend discussing your unique situation with an experienced securities attorney who can determine the best course of action based on the facts and circumstances.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.