The U.S. Securities and Exchange Commission has issued its first ever letter assuring investors in a startup using crypto-tokens similar to bitcoin to raise capital that it will not take an enforcement action against the company, and in a separate document explained the rationale behind the decision for future companies.
The company that received the precedent-setting letter, called a No Action Letter, was TurnKey Jets, a startup that offers an all-inclusive private jet service including the plane, crew, and pilot. Interestingly, the company’s website has no mention of a crypto-token, which appears to play a role in the actual reservation of the services.
In addition to the much anticipated No Action letter the SEC’s FinHub, established in October 2018 to address issues related to cryptocurrency and other financial innovations, published a lengthy, highly anticipated document explaining its rationale for evaluating such requests.
“It’s not binding on the rest the commission,” says Bill Hinman, the SEC’s director of the division of corporation finance. “But it gives market participants a good idea of how the SEC staff will look at the issue and deal with it.”
The No Action Letter includes six key points related to TurnKey Jets. Notably, the company has promised not use any funds from token sales to develop its platform, network and applications, each of which will be fully developed and operational when the tokens are sold. Also, the tokens will be immediately usable to purchase air charter services when they are sold.
“At the time their digital assets are sold the seller is going to have a fully operational network,” says Valerie A. Szczepanik, the SEC’s senior advisor for digital assets and innovation, who, working with Finman, helped craft the overall digital assets framework. Read the entire letter here.
The conditions, which were presented by TurnKey and are not part of any official request by the SEC, appear tailored to accusations widely made in the media and elsewhere online against issuers of first-generation initial coin offerings (ICOs), when millions of dollars could be raised with little more than a white paper.
In the official 13-page document also released today, called “Framework for ‘Investment Contract’ Analysis of Digital Assets,” the SEC lays out a detailed explanation of how the existing Howey Test used to determine what is a security is being applied to digital assets issued on a blockchain. The vast majority of the document details how the SEC views what is considered a reasonable expectation that profits will be derived from the efforts of others, a crucial factor of the test.
The most interesting section begins on page 9, with 12 characteristics that if present, mean the token offering is less likely to pass the Howey test. The first two are crucial. “The distributed ledger network and digital asset are fully developed and operational,” and “holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use.”
While the SEC has fined numerous individuals in the cryptocurrency space as examples of what not to do, today’s news marks the clearest guidance yet about what to do. “Decentralization is important,” says Hinman. “But it’s not the only factor.”
The chief legal advisor of the SEC’s FinHub, Jonathan Ingram, who signed the actual No Action letter, says entrepreneurs thinking of issuing a token can contact the regulator via its FinHub website. “We are open for business,” says Ingram. “And we want people to engage with us.”