On April 2, 2019, the Division of Corporation Finance of the Securities and Exchange Commission issued a no-action letter to TurnKey Jet, Inc. in connection with a proposed sale of tokens in the United States. It was the first no-action letter relating to cryptocurrencies and was widely heralded as a watershed event (e.g., “SEC Issues First ‘No-Action’ Letter Clearing ICO to Sell Tokens in US”)(see here).

But what does the SEC’s no-action letter really mean? First, a no-action letter is the SEC’s staff response to a request that the SEC not take enforcement action against the requestor based on the specific facts and circumstances set forth in the request. In most cases, the staff will not permit parties other than the requester to rely on the no-action letter. As was the case here, the staff’s response often is based in part on the legal opinion rendered by the requester’s lawyer that the proposed conduct is not a violation of the federal securities laws.

But no-action letters do provide a window into the thinking of the SEC and the direction in which the agency may be heading on an issue.

The TurnKey Jet no-action letter will have little precedential value for most blockchain projects today because the company’s tokens appear to be little more than prepaid tickets recorded on a blockchain. In short, TurnKey Jet’s tokens, platform and network simply will be a 24/7 air charter services payment debit/credit system for financial transactions. The tokens redeemable for air charter services will be like business jet card programs that are common in the aviation industry today. There appear to be no securities laws at issue.

A key factor in the SEC staff’s decision to issue the no-action letter was TurnKey Jet’s assurance that at no time would it utilize proceeds from its token offering to develop its platform, network, app and token. Instead, the proceeds were to be held in escrow until redeemed by token purchasers to purchase charter air services.

Another significant factor in the staff’s decision was the tokens would not be transferrable and they could not be redeemed at a price greater than their face value of one US Dollar per token. Moreover, the tokens would not represent an obligation to supply a specified number of flight hours regardless of cost. In other words, there was no possibility for the purchaser to obtain a return in excess of the amount paid for the token. As such, the TurnKey Jet blockchain project bears little resemblance to most blockchain projects today.

Today, successful blockchain projects incorporate “token economics” – a concept coined years ago by behavioral scientists that posits that we can all be led to take certain actions based on incentives offered to us. At MSK, our blockchain startup clients adopt token economics by designing and monetizing new protocols and platforms that provide incentives to early-adopter stakeholders through token offerings. As the platforms grow, the tokens become more valuable allowing users – not just the venture capitalists who historically funded these startups – to profit.

And therein lies the rub. When users invest money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of other people, they are purchasing “investment contracts,” which the U.S. Supreme Court in a 1946 ruling held are “securities” as defined in the Securities Act of 1933.

But there is hope in the actions taken by the SEC this week. On the same day that it issued its no-action letter, the Division of Corporation Finance staff published an 11-page “Framework for ‘Investment Contract’ Analysis of Digital Assets.” While the publication raises a number of questions, to MSK’s securities lawyers, the staff guidance provides a useful framework by which to analyze the more than 70-years of legal precedent since the 1946 Howey case to ensure that our clients conduct token offerings without running afoul of federal securities laws.