SEC issues first-ever no-action letter to token issuer

04.08.19

The Securities and Exchange Commission’s (SEC) Division of Corporation Finance has issued a no-action letter to TurnKey Jet, Inc. (TurnKey), a cryptographic token issuer. To our knowledge, the no-action letter issued to TurnKey is the first such letter in history to be issued by the SEC to an issuer of cryptographic tokens.

Much like the JPM Coin issued by JP Morgan, TurnKey’s tokens can only be used in a “walled garden” platform on a private blockchain, in order to facilitate payment. Another parallel is that it is intended to function much like a subscription-based, frequent flyer program that many airlines currently offer, where members can use points to purchase flights rather than using cash.

The SEC put a number of conditions on its recommendation that no enforcement be brought against TurnKey, in particular:

• TurnKey will not use any funds from token sales to develop its platform, network, or applications, and each of these will be fully developed and operational at the time any tokens are sold;
• TurnKey’s tokens will be immediately usable for their intended functionality (purchasing air charter services) at the time they are sold;
• TurnKey will restrict transfers of tokens to token wallets created by TurnKey and inside TurnKey’s walled garden only (i.e., TurnKey’s tokens likely can’t be traded on a digital token exchange, or at least one that is not operated as part of TurkKey’s platform);
• TurnKey will sell its tokens at a price of one USD per token in perpetuity, and each token will only represent an obligation of TurnKey to supply air charter services at a value of one USD per Token;
• If TurnKey offers to repurchase tokens, it will only do so at a discount to the face value of the tokens (one USD per token), unless a court within the United States orders TurnKey to liquidate the tokens; and
• TurnKey’s tokens are 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.

It’s also important to note that the SEC’s position is based on the representations made to the SEC’s Division of Corporation Finance in the Company’s correspondence, and any deviation from those representations could lead to the SEC reach an ‘actionable’ conclusion instead.

Also worth noting is that, in conjunction with the no-action letter discussed above, the SEC released a long-awaited framework for the “investment contract” analysis of digital assets, seemingly largely intended for token issuers (likely conducting an initial coin offering, or ICO), which can be found here. However, this framework was merely part of a public statement made by SEC employees, and according to usual disclaimer that accompanies such statements: “This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission. It does not constitute legal advice, for which you should consult with your own attorney. It does not modify or replace any existing applicable laws, regulations, or rules.”