On July 25, 2019, the SEC issued its second no action letter that enables a company to generate and sell digital tokens that are not “securities” within the meaning of the US securities laws. This no-action letter provides a no action relief to Pocketful of Quarters, Inc. (“PoQ”) that intends to sell Quarters (its native digital tokens) to gamers for use in connection with playing games of the participating developers on their platform. Just in April of this year, the SEC issued a similar no action letter to TurnKey Jet, Inc.
Below are my observations regarding this no action letter and token issuance in general:
- This second no action letter helps us delineate the universe of utility tokens. They are not just a concept that was abused and misused in the 2017-2018 ICOs. Utility tokens can legally exist within the legal framework of the US laws.
- If previously the SEC had only shown us the instruments that cannot be utility tokens (through its cease and desist orders and various enforcement actions), then now, for the second time, we are shown examples of tokens that can be and are utility tokens. This is incredibly useful guidance when advising clients on how to structure their tokens.
- PoQ financed the development of its gaming platform through the issuance and sale of Q2 TOkens that were treated as “securities”. The Quarters that are subject to this no action letter are being issued after the platform development has been completed. Again, this approach (issuing two types of tokens) can be used by others when conducting their token offerings.
- Quarters are not redeemable by gamers. Once purchased, Quarters can only be used within the platform to play games, purchase upgrades, and participate in tournaments. The only persons who can redeem the Quarters are the participating pre-approved developers and influencers who can earn the tokens by developing games and marketing them to the gamers.
- Quarters will be sold at a fixed price, and there will be an unlimited supply of them. This means that there will be no price speculation and no shortage that could affect the price.
- Quarters cannot be transferred to other gamers, and therefore Quarters cannot be, and will not be, traded on secondary markets. This means that gamers would not be purchasing the tokens with an expectation to make a profit.
- Quarters will be sold only for the gamers’ personal use within the gaming platform.
- Quarters will not be marketed to the public as an investment, and PoQ will make corresponding disclosures in its marketing literature.
As described in the thorough and well-written incoming letter, the Quarters present an example of true utility tokens that others may be tempted to replicate. However, it is important to remember that only the recipient of the no action letter can legally rely on it. Other tokens will have different features that may or may not support the legal outcome that these tokens are not “securities”. But still, the PoQ no action letter presents a good model of how to structure an offering of utility tokens that should be studied by the future token issuers.
This article is not legal advice and was written for general informational purposes only. It does not express anyone else’s views except for the author’s. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Arina Shulga.