On April 3, 2019, the SEC responded favorably to a No-Action Letter submitted by TurnKey Jet, Inc. (TKJ) detailing its proposal to offer and sell blockchain-based digital assets in the form of “tokenized” jet cards (“Tokens”). In its request, TKJ sought to offer and sell the Tokens without registering the offering under Section 5 of the Securities Act of 1933, and Section 12(g) of the Securities Exchange Act of 1934. The SEC determined that it would not sue TKJ for offering its Tokens since they likely did not constitute securities based on several distinct characteristics and functionalities.
TKJ’s Business and Platform
TKJ provides interstate air charter services as a licensed United States air carrier and air taxi operator. TKJ proposes to launch a Token membership program (“Program”) and develop a Token platform (“Platform”) to facilitate Token sales for air charter services via a private blockchain network (“Network”). The envisioned platform would consist of three types of token users: (1) consumers who purchase the tokens to use them as a means of payment for services; (2) brokers who middle-man charter services for consumers and charter companies; and (3) carriers who deliver charter flights directly to consumers via the Platform with their own fleet of planes are carriers. Consumers would purchase the Tokens for a fixed price of $1.00/Token, a price set by TKJ. The price will not fluctuate at any time. Tokens can be redeemed by the consumers for aircraft services.
In this instance, the private blockchain and platform envisioned by TKJ would provide it would multiple competitive advantages, including incentivizing users to join the platform by offering them the ability to transact outside of traditional banking hours using the Tokens and TKJ’s mobile application.
The Token Smart Contracts
The proposed Tokens intended to include smart contract functionality and TKJ would create and deploy them on the Platform. TKJ proposed separate membership agreements would control their relationship with the consumers, brokers, and carriers, but the terms of each would require TKJ to release the fiat currency it holds in escrow to a broker or carrier to pay for the provided air charter services to a TKJ Member and holder of Tokens who exercises their right per the smart contract to redeem the Tokens at their equivalent value for those services on-demand.
The smart contracts would also include terms of service restricting transfer and setting forth that the Tokens are the prepayment of the future consumption of air charter services and there will be no return of principal or interest on the prepaid monies. Further, TKJ would use the smart contracts to execute to repurchase TJK’s from carriers or brokers who wish to cash out and collect their earnings.
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. Only TKJ has the authority and capability to issue Tokens into circulation, or upon redemption remove them from circulation. In addition to the terms of the smart contracts restricting the transfer of the Tokens, TKJ will implement technical restrictions via the Platform and Network that restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform.
SEC’s No-Action Determination
The SEC, relying on the representations of TKJ regarding the characteristics and functionalities of the Tokens, the platform, the private blockchain network, the smart contracts, and the rights of the various parties who may obtain and transact with the Tokens, determined it would not sue TKJ. The following factors were crucial to the SEC’s decision:
- TKJ will not use any funds from Token sales to develop the TKJ 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 their intended functionality (purchasing air charter services) at the time they are sold;
- TKJ will restrict transfers of Tokens to TKJ Wallets only, and not to wallets external to the Platform;
- TKJ will sell Tokens at a price of one USD per Token throughout the life of the Program, and each Token will represent a TKJ obligation to supply air charter services at a value of one USD per Token;
- If TKJ offers to repurchase Tokens, it will only do so at a discount to the face value of the Tokens (one USD per Token) that the holder seeks to resell to TKJ unless a court within the United States orders TKJ to liquidate the Tokens; and
- The Token is marketed in a manner that emphasizes the functionality of the Token, and not the potential for the increase in the market value of the Token.
The SEC’s response to this No-Action Letter carves a clear path for those who wish to implement blockchain and token payment systems without running afoul of securities laws. Although, Token Issuers and blockchain developers must remain vigilant of the evolving regulatory landscape, including the SEC’s interpretation of the Securities Act and the potential applicability of money transmission laws and regulations to digital tokens
If you have questions regarding your blockchain project or a token offering, contact our law office to speak with an attorney.
The author of this article is Tyler Harttraft, Esq., a partner at Bull Blockchain Law. Tyler represents entrepreneurs and businesses specifically focused on projects related to blockchain technology, digital assets, and virtual currency activities.