On April 3, 2019 the staff of the Securities and Exchange Commission issued its first no-action letter stating that it would not recommend enforcement action if an issuer publicly issued tokens without registration under the Securities Act or the Securities Exchange Act.
Following a number of SEC enforcement actions to stop token offerings that the SEC asserted were unlawful public offering of securities, this letter provides the clearest guidelines to date as to when, in the SEC staff’s view, a token is exclusively a “utility” token and therefore is not subject to the securities laws.
The issuer requesting the no-action letter is in the private jet charter business, and the requesting letter explains the issuer’s program in detail. The program members may purchase tokens through a blockchain network. Each token will represent the right to obtain jet charter services. The issuer will escrow the funds paid for the tokens and will use the funds to pay carriers for air transport services provided to the person submitting the tokens. The issuer states that its program and tokens will allow for settlement via blockchain, decreasing the settlement time and improving the efficiencies of paying for and obtaining air charter services for both consumers and the issuer. They believe that it will significantly reduce transaction costs that financial institutions charge in payment settlement for air charter services. The issuer states that the tokens in operation will be like the business jet card programs that are common in the industry today.
The SEC staff noted the following in granting its no-action position:
- The issuer will not use any funds from token sales to develop the issuer’s platform, network or app, and each of these will be fully developed and operational at the time any tokens are sold;
- The tokens will be immediately usable for purchasing air charter services at the time they are sold;
- The issuer will restrict transfers of tokens to only the issuer’s wallets and will not permit transfers to wallets external to the issuer’s platform;
- The issuer will sell tokens at a price of one US Dollar per token throughout the life of the program, and each token will represent the issuer’s obligation to pay for air charter services at a value of one US Dollar per token;
- If the issuer ever offers to repurchase tokens, it will only do so at a discount to the face value of the tokens that the holder seeks to resell to the issuer; and
- The token will be marketed in a manner that emphasizes the functionality of the token and not any potential for the increase in the market value of the token.
Although this letter is notable as the first SEC no-action letter expressly permitting a token offering, it has very significant limitations:
There is no element of “capital raising.” The letter follows the SEC’s previously stated position that an unregistered token must be offered exclusively for its utility value. The issuer’s platform, network and app must be fully developed and operational and the tokens immediately usable for their intended functionality at the time they are sold. The funds raised from the sale of the tokens will be placed in escrow to pay for the specified services and cannot be used for any other purpose.
There is no opportunity for profit from the ownership of the tokens. The tokens will be sold at same fixed price throughout the life of the program, and each token will represent an issuer obligation to pay for the specified services at the same fixed value per token.
There will be no other trading market. The tokens may only be transferred on the issuer’s network among the participating consumers, brokers and service providers.
This no-action letter provides specific guidelines for the development, promotion, distribution and use of utility tokens free of securities law limitations. Companies exploring new blockchain applications may design programs with features substantially similar to the system described in the letter without undue concern for securities law violations or SEC enforcement action. However, the SEC’s prior stated position on the use of digital tokens as a means of raising capital has not been relaxed. The SEC still requires that issuers use means other than the public distribution of tokens to raise capital.