SEC Issues First No Action Letter Featuring a Tokenized Digital Asset Which is Not a Security
On April 3rd 2019, the United States Securities and Exchange Commission (SEC) publicly released its first-ever no action letter regarding a digital token which was deemed to not be a security. The letter featured TurnKey Jet (TKJ) tokens which can be redeemed for services in the TurnKey Jet program.
TurnKey Jet Receiving the SEC’s First Ever No Action Letter Explained
In response to a request from attorney and TurnKey Jet representative James Curry, the SEC Division of Corporate Finance has issued a no action letter pertaining to the TKJ token.
The token, says the SEC, is not considered to be a regulated security.
TurnKey Jet established a program featuring membership in an air charter service. The program included TKJ tokens, tied to one USD, which can be redeemed for services by members of the program.
The no action letter— which can be viewed here— suggested the token has a mere utility function and constitutes no securities status.
Does TurnKey Jet’s No Action Letter Provide a Template for Others?
According to securities attorney Scott Andersen, the SEC turned to legal counsel in making their decision.
Andersen— who previously worked for FINRA— said there were two main concerns in the determination: whether or not the asset’s issuance had the primary purpose of funding a digital platform, and if the token purchaser had a primary incentive of the token’s increased value over time.
“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.”
Importantly, Andersen believes the significance of the determination lies in providing a blueprint for other companies to issue digital assets which are not regulated securities.
Reactions from Industry Leaders on TurnKey Jet’s No Action Letter
From those at the forefront of the integration of finance and blockchain technology, reactions were mixed.
Caitlin Long— the individual behind Wyoming’s recent legislation supporting blockchain technology— tweeted the following:
FIRST EVER no-action letter by the SEC on a #crypto token — that’s big news. #Wyoming‘s trail-blazing #utilitytoken law is looking quite good when viewed against new SEC guidance, & states that copied it (#Colorado+8 others in process) look SMAAAAAAART!!!
Mason Borda, TokenSoft CEO and security token industry thought leader, tweeted a different perspective:
As a business operator, the TurnKey Jet no action letter was a bit sad to see. Generally, you get a no action letter if you’re concerned that you are doing something you shouldn’t be doing in the eyes of the SEC.
The outcome of the no action letter was that TurnKey Jet would issue a token that was not usable outside of their platform. Also, that TurnKey Jet “token” had to be worth exactly a dollar.
TurnKey Jet just spent $100k in legal fees to learn that the SEC is ok with them doing something, they could have done anyways. If they had left out the word token, this wouldn’t have been an issue.
Regardless of the different takes, one thing is clear: the presence of regulatory bodies is increasingly entering the digital asset space.
As a result, Initial Coin Offering (ICO) funding has disappeared. Recent analysis suggests ICOs now raise 58 times less than they did at this time last year.
Yet still, the digital asset space continues to grow. Institutional giants such as JPMorgan, Fidelity, and NASDAQ have entered the space.
The resulting situation has seen the emergence of the Security Token Offering (STO)— a regulatory safe alternative to the ICO.
For more on the functionality of this emerging asset class, be sure to review our comprehensive security token guide.
What do you think of the SEC’s no action letter addressing the TurnKey Jet token? Will other enterprises perform similar action when trying to avoid securities regulations while issuing a digital asset? Let us know what you think in the comments section below.
Image courtesy of the SEC.