SEC Issuance of Crypto Token Action Letter

On April 3, 2019, the SEC issued its first no-action letter for a crypto token! This is a significant step in providing regulatory clarity for when a token is NOT a security or at least when the SEC will not take any enforcement action. On the same day it also issued Framework for the analysis of the “investment contract” of digital assets (which we will talk about in a separate blog post).

The no-action letter issued to TurnKey Jet, Inc. (TKJ) states that the Division of Corporate Finance will not recommend enforcement action if TKJ offers and sells the tokens as described in the TKJ filing letter calling for inaction. Specifically, the inaction letter stated that in reaching her position she had focused on the following statements in the letter:

• TKJ will not use any funds derived from Token sales to develop the TKJ Platform, Network or App, each of which will be fully developed and operational at the time of the Token sale;
• Tokens will be immediately usable for the functionality for which they were designed (purchasing air charter services) at the time of sale;
• TKJ will limit Token transfers to TKJ Wallets only and not to wallets outside the Platform;
• TKJ will sell the Tokens at a price of one USD per Token for the duration of the Program and each Token will represent an obligation by TKJ to provide air charter services at the value of one USD per Token;
• If TKJ offers to buy back the Tokens, it will do so only at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ, unless a U.S. court orders TKJ to liquidate the Tokens; and
• The Token is marketed in a way that emphasizes the functionality of the Token and not the potential increase in market value of the Token.

As usual, the no-action letter concludes with a statement that its position is based on the representations made to the Division in TKJ’s letter. It cautions that any differing facts or conditions may require the Division to reach a different conclusion and that the response expresses only the Division’s position on the enforcement action and does not express any legal conclusions on the issue presented.

The proposed TKJ tokens will run and be distributed on a private, permissioned, centralized blockchain network and smart contract infrastructure operated by TKJ. TKJ will limit token transfers to TKJ wallets only, and not to wallets outside of the platform. In essence, this seems like a closed-loop system, and it appears that the tokens will not be tradable on public cryptocurrency exchanges. While this is a somewhat restrictive use of the tokens, it is still significant that the SEC issued the no-action letter.

We expect this event to lead to a flurry of activity from others seeking no-action letters. Check back as we will provide periodic updates on other significant decisions.

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