On the same day DLXLaw sent a letter requesting “no-action” by the Securities and Exchange Commission (SEC) Enforcement Division, Pocketful of Quarters received a response from the SEC indicating its intent not to take any action against the blockchain-based platform.
DLXLaw is a boutique law firm that specializes in blockchain firms and smart contracts.
Pocketful of Quarters, a company launching a “universal gaming token” that may only be used within the ecosystem, received an important blessing from the SEC indicating the proposed digital asset was not a security and thus not regulated under existing security law.
Pocketful of Quarters seeks to eliminate gaming fragmentation by providing a universal token for all gaming platforms that participate in their ecosystem. There are two tokens being issued. Quarters which are the tokens being minted for use by gamers and Q2 Tokens which are securities that may benefit from the success of the platform.
The Quarters may only be used in the PoQ ecosystem and, critically, may not be traded on a secondary exchange thus blocking users from speculating on the value of the digital asset. The company will only market Quarters for “consumptive use” and as a means for accessing participating games. Additionally, there is no cap on minted tokens.
Pleasing the SEC Division of Corporate Finance
DLXLaw was clearcut in both the “use of proceeds” and “manner of sale” – two areas the SEC has targeted for determining whether or not a digital asset is a security.
The use of proceeds for the Quarters will not be used to develop the platform which has already been financed, due in part to the Q2 Tokens. The platform itself is said to be fully developed thus snuffing out any security like risk affiliated with token issuance and uncompleted platforms.
To quote DLXLaw:
“Any funds received, either via US dollars or ETH, Instead, funds received from the sales of Quarters will be held in the Quarters Smart Contract in ETH and used to remunerate Developers, Influencers and Q2 Token holders as further described herein.”
Perhaps the most novel aspect of the blockchain ecosystem is the usage of Quarters to remunerate “Approved Accounts,” white-listed individuals who are developers or influencers to encourage usage of the PoQ platform.
As DLXLaw explains:
“Influencers will receive compensation from PoQ for these and other marketing efforts. This compensation will be primarily in dollars. Influencers may also receive compensation in the form of Quarters from PoQ for hosting e-sports tournaments that use Quarters for the entry fee. In such a circumstance, Influencers will be contractually entitled to receive a percentage of the Quarters used by gamers to enter the relevant tournament and any such Quarters w ill be allocated by PoQ to the applicable Influencer’s Quarters Hot Wallet at the conclusion of any such tournament. This is the sole method by which Influencers will receive compensation involving Quarters. Per the terms of the Approved Account Agreement, the only thing that Influencers will be permitted to do with any Quarters they receive is transfer those Quarters to the QuartersSmart Contract in exchange for ETH. Similarly, per the terms of the Approved Account Agreement, Developers will only be permitted to transfer Quarters to the Quarters Smart Contract in exchange for ETH as well as provide Quarters to the Quarters Hot Wallets of gamers that have used Quarters to play a particular game and earned in-game rewards in such game during gameplay (“Gamer Rewards”).
Howey Has its Say
In CorpFin’s response, the SEC noted that Approved Accounts must go through KYC/AML validation and these users are the only ones that are able to transfer Quarters to ETH at “pre-determined exchange rates.” CorpFin’s recommendation for “no-action” bullets out the Howey requirements.
The letter from the SEC (reproduced below) is signed by the Chief Legal Advisor of FinHub, the SEC’s innovation division. The rapidity of the response is indicative of what must have been a long conversation between the two sides to make certain the Commission’s requirements were satisfied.
The Incoming Letter from DLXLaw is also embedded below.
Pocketful of Quarters, Inc.
Response of the Division of Corporation Finance
July 25, 2019
Re: Pocketful of Quarters, Inc.
Incoming letter dated July 25, 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 Quarters are not securities, PoQ offers and sells the Quarters without registration under Section 5 of the Securities Act and does not register Quarters as a class of equity securities under Section 12(g) of the Exchange Act. Capitalized terms have the same meanings as defined in your letter.
In reaching this position, we particularly note that:
- PoQ will not use any funds from Quarters sales to build the Quarters Platform, which has been fully developed and will be fully functional and operational immediately upon its launch and before any of the Quarters are sold;
- the Quarters will be immediately usable for their intended purpose (gaming) at the time they are sold;
- PoQ will implement technological and contractual provisions governing the Quarters and the Quarters Platform that restrict the transfer of Quarters to PoQ or to wallets on the Quarters Platform;
- gamers will only be able to transfer Quarters from their Quarters Hot Wallets for gameplay to addresses of Developers with Approved Accounts or to PoQ in connection with participation in e-sports tournaments;
- only Developers and Influencers with Approved Accounts will be capable of exchanging Quarters for ETH at pre-determined exchange rates by transferring their Quarters to the Quarters Smart Contract;
- to create an Approved Account, Developers and Influencers will be subject to KYC / AML checks at account initiation as well as on an ongoing basis;
- Quarters will be made continuously available to gamers in unlimited quantities at a fixed price;
- there will be a correlation between the purchase price of Quarters and the market price of accessing and interacting with Participating Games; and
- PoQ will market and sell Quarters to gamers solely for consumptive use as a means of accessing and interacting with Participating Games.
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 or on the applicability of any other laws, including the Bank Secrecy Act and anti-money laundering and related frameworks.
Jonathan A. Ingram
Chief Legal Advisor, FinHub
Division of Corporation Finance