SEC Issues First ‘No-Action’ Letter Clearing ICO to Sell Tokens in US
The U.S. Securities and Exchange Commission (SEC) has issued a “no-action” letter to TurnKey Jet, Inc., agreeing that tokens used by the business-travel startup are not securities. The regulatory stamp of approval is contingent upon the company using its tokens under certain conditions.
Those conditions include:
- Token-generated funds cannot be used to develop the company’s platform technology (such as its app).
- The tokens will be immediately useful.
- The TKJ tokens will remain at a fixed price of one U.S. dollar.
- The tokens can only be used for air charter services.
- Repurchases will only be made at a discount to the token.
- TurnKey Jet will not represent the tokens as having profit potential.
TurnKey Jet is an air charter and air taxi service based in the United States, operating from West Palm Beach, Florida, since 2012.
The letter, dated April 3, comes in reply to a letter from James P. Curry, counsel for TurnKey Jet, dated April 2. 2019. The letter was signed by Jonathan A. Ingram of the SEC’s Division of Corporate Finance.
Perhaps the most interesting provision requires that the tokens not be transferable. The SEC’s letter says, “TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform.”
A person familiar with the news told CoinDesk, “Many in the industry have asked how the commission might give some relief in a case where folks are trying to bring this technology into a real-life use case, and the no-action letter simply says the division will not recommend an enforcement action.”
Experts weigh in
“It is a huge step forward for the industry to have a no-action letter published,” cryptocurrency and finance attorney Joshua Ashley Klayman of Klayman LLC told CoinDesk. “It is the sort of guidance that the market needs and has been looking for.”
That the SEC’s letter relies upon the opinion of TurnKey’s counsel is also notable, Klayman pointed out.
Other legal experts in the space saw it to be less noteworthy, however, considering many of the outlined restrictions.
“The issue most coin offerings undertaken to date will face is that they possess many elements common to products that, in the past, courts have found to be security-like,” Preston Byrne, a lawyer at Byrne & Storm, P.C., told CoinDesk. “Although the no-action letter is a new development, I don’t see it creating a viable issuance pathway within the United States for the crypto-token products most enterprises are hoping to build.”
As CoinDesk has previously reported, attorneys have been waiting on requested no-action letters for some time. In December, the SEC’s “crypto czar,” Valerie Szczepanik, discussed the agency’s ongoing negotiations with crypto startups around token sales.
Sczczepanik has been urging companies to interact directly with the agency, suggesting better outcomes will occur if they do.
“We’d much rather have people come and ask us before they do something rather than coming and asking for forgiveness,” she said last month at SXSW.
With one project’s plan greenlit, this letter may be held out as a case in point.
TurnKey Jet is a Florida company, domiciled in Delaware, that has been in operation since 2012, according to Curry’s letter. The company describes a number of inefficiencies in its industry that it believes smart contracts can help solve.
TurnKey’s letter goes into some detail about the token’s use:
“Redeemable for air charter services, the proposed Tokens in operation will be like the business jet card programs that are common in the aviation industry today.”
TurnKey further asserts that these tokens will not obligate the company to provide service at any cost; rather, one TKJ will represent one USD worth of fees.
All outstanding tokens will be fully backed by an equal amount of fiat in an FDIC-insured institution, the company writes.
The TurnKey letter notes that only the company will be able to generate tokens and that the sale will be on an ongoing basis. Tokens will be nonrefundable and destroyed as users spend them – and escrowed USD will be remitted to the company or its business partners.
While the SEC’s letter forbid the tokens from leaving wallets controlled by TurnKey Jet, it did not object to this statement within its letter to the agency: “When a Token enters circulation, TKJ Consumers may freely trade or exchange the Tokens in their possession between any other Consumer, Broker or Carrier within the Network.”
Separately on Wednesday, the SEC released long-awaited regulatory guidance for token sellers (read more here).
This is a developing story and CoinDesk will update as needed.
Additional reporting by Nikhilesh De.
SEC image via Shutterstock