On November 19, 2020, IMVU, Inc. (“IMVU”) received no-action relief from the Securities and Exchange Commission (the “SEC”) confirming that the Division of Corporate Finance will not recommend enforcement action against IMVU for selling its digital asset, VCOIN. IMVU intends to issue and sell VCOIN for immediate use within its online three-dimensional avatar-based social community, “IMVU.” IMVU will supply an unlimited number of VCOIN at a fixed price of $0.004 per VCOIN to replace its current system of providing in-platform “credits” for participants to use to purchase virtual goods and services within the platform.

IMVU’s No-Action Letter Request to the SEC argued that VCOIN is not a “security” within the meaning of Section 2(a)(1) of the Securities Act of 1933, as amended (the “Securities Act”), or Section 3(a)(10) of the Exchange Act of 1943, as amended (the “Exchange Act”), and, therefore, that registration under the Securities Act is not required. IMVU’s argument focused on the Howey “investment contract” test and requested no-action relief only with respect to VCOIN’s potential classification as an investment contract. Under the Howey test, an investment contract is a security if there is (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits derived from the efforts of others.

IMVU’s Argument

Acknowledging that purchasers of VCOIN were arguably making an investment of money in a common enterprise because they will pay fiat currency to IMVU when they purchase VCOIN, IMVU successfully focused its argument on refuting any possible claim that purchasers of VCOIN were doing so with the expectation of profits derived from the efforts of others. IMVU underscored that argument elaborating on four key factors, including:

• VCOIN will be utilized by participants in IMVU for consumptive, platform-related uses.
• VCOIN will be immediately usable within the platform when sold by IMVU.
• IMVU will sell VCOIN to participants and repurchase VCOIN from participants at a fixed price.
• IMVU will implement controls to encourage the actual use of VCOINs within the platform and deter any speculation.

In addition to the above, IMVU noted in its letter that it will register as a Money Services Business (“MSB”) or state money transmitter as required, or alternatively will joint venture with an entity that is already licensed as an MSB. IMVU’s letter places a heavy emphasis on anti-money laundering and know-your customer controls (“AML/KYC”) and goes as far as to suggest the implantation of the VCOIN in the IMVU platform will increase the IMVU’s ability to monitor transactions and identify potentially fraudulent activity using blockchain analytics.

IMVU summarized its Howey analysis succinctly stating, “No [u]ser who purchases VCOIN would reasonably expect profits or capital appreciation resulting from IMVU’s efforts. VCOIN is a digital asset that IMVU’s millions of [u]sers will purchase as a means of engaging in virtual commerce in connection with the [p]latform. IMVU will generate an unlimited supply of VCOIN, sell each VCOIN at the fixed price of $0.004, and repurchase VCOIN at the same price, making it irrational for any VCOIN purchaser to expect capital appreciation in VCOIN.”

SEC’s No-Action Determination

In granting its no-action relief, the SEC highlighted the following reasons for its determination that the VCOIN is not a security:

• IMVU will not use proceeds from the sale of VCOIN to finance the implementation of the blockchain-based coin, which has been fully developed and will be fully functional and operational immediately upon its launch and before any VCOIN is sold;
• VCOIN will be immediately usable for its intended purpose at the time it is sold;
• IMVU will impose specified limits on VCOIN purchases, conversions, and transfers;
• VCOIN holders will be subject to KYC/AML checks when they establish VCOIN wallets and thereafter on an ongoing basis;
• VCOIN will be made continuously available in unlimited quantities and at a fixed price, and IMVU will always generate enough supply of VCOIN to maintain VCOIN’s fixed price;
• IMVU will not promote or support listing or trading of VCOIN on any third-party trading platform;
• IMVU will market and sell VCOIN to participants solely for consumptive use as a means of exchanging value on, and in connection with, the IMVU platform; and
• IMVU will require participants who purchase VCOIN from IMVU to affirm that, among other things, they are acquiring the VCOIN for consumptive use and not for speculative purposes.

Conclusion

The SEC’s no-action relief for IMVU’s VCOIN signals another steps towards the regulator distinguishing utility tokens/coins from the broader umbrella of digital assets that are presumptively securities. IMVU is not using the sale of VCOIN as a fundraising scheme to develop the digital asset, which, bolstered by the maturity of the IMVU platform, likely helped the SEC reach its determination that VCOIN is not a security. In addition, the unlimited supply of VCOIN at a fixed price make clear that IMVU has designed VCOIN in such a way to specifically deter speculation by passive investors. This no-action relief for IMVU’s VCOIN creates a potential roadmap for similar platforms to develop and launch in-app digital currencies.