The Securities and Exchange Commission (SEC), Division of Corporate Finance, has issued its first No-Action letter pertaining to the issuance of a token that is considered not to be a regulated security.
The response was engendered by a request by attorney James Curry, on behalf of his client Turnkey Jet.
TurnKey Jet proposed a token program for membership in an air charter service. The TKJ tokens would be tied to a single US dollar and redeemed for services by members in the program. Curry, requested that these digital assets not be deemed securities under the Exchange Act.
The SEC’s no-action letter, reproduced below, determined the tokens are NOT securities and thus represent a utility function.
Crowdfund Insider Contributor and Securities Attorney Anthony Zeoli welcomed the move by the Commission:
“Based on prior SEC guidance it was implied that a particular cryptocurrency/token could theoretically exist which would not be considered a security but until now there has been know bright line guidance on what factors might be considered in that analysis by the SEC. While certainly not depository on the issue, this recent SEC no-action letter ruling goes a long way in clarifying those factors.”
Securities Attorney Scott Andersen, who previously worked for FINRA, said the SEC relied on the opinion of legal counsel that set forth factual representations alleviating the concern that the digital asset issuance was for the purpose of funding the development of a digital platform or that the incentive for a purchaser buying its token rested primarily on a hope that the token will increase in value.
“In Turnkey, the platform was already fully developed and operational and the tokens were immediately usable for the intended functionality, thus no funds from the sale were to be used to develop the platform. Separately, as the tokens were restricted to Turnkey wallets only (and not to wallets external to the platform), were to be sold for the life of the program at at a fixed price of one USD per token, and as Turnkey could only repurchase tokens from its holders at a discount to the token’s face value of one USD, the SEC appears to have become comfortable that any purchases of the token would not be for investment purposes. This conclusion too was aided by the fact that Turnkey represented that the token would not be marketed in a manner that emphasized the potential that its token could increase in value.”
Andersen said the significance of the no-action relief is there is now a template as to when a digital asset is not a security.
Simultaneously, the SEC published a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” This new Framework will be used by digital asset issuers to better determine or structure their offerings as either regulated securities or non-security digital assets.
April 3, 2019
Response of the Division of Corporation Finance
TurnKey Jet, Inc.
Incoming letter dated April 2, 2019
Based on the facts presented, the Division will not recommend enforcement action to the Commission if, in reliance on your opinion as counsel that the Tokens are not securities, TKJ offers and sells the Tokens without registration under the Securities Act and the Exchange Act. Capitalized terms have the same meanings as defined in your letter.
In reaching this position, we particularly note that:
- 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.
This position is based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion. Further, this response expresses the Division’s position on enforcement action only and does not express any legal conclusion on the question presented.
Jonathan A. Ingram
Chief Legal Advisor, FinHub
Division of Corporation Finance