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FINLAW: No action letter issued by SEC as to when a digital asset is not a security, April 3, 2019


The SEC today issued no action relief to Turnkey Jet, Inc. (Turnkey) providing for the first time an analysis of when a digital asset is not a security.  Unsurprising, the SEC relied on the opinion of legal counsel that set forth factual representations alleviating the concern that the digital asset issuance was for the purpose of funding the development of a digital platform or that the incentive for a purchaser buying its token rested primarily on a hope that the token will increase in value.

In Turnkey, the platform was already fully developed and operational and the tokens were immediately usable for the intended functionality, thus no funds from the sale were to be used to develop the platform.  Separately, as the tokens were restricted to Turnkey wallets only (and not to wallets external to the platform), were to be sold for the life of the program at at a fixed price of one USD per token, and as Turnkey could only repurchase tokens from its holders at a discount to the token’s face value of one USD, the SEC appears to have become comfortable that any purchases of the token would not be for investment purposes.  This conclusion too was aided by the fact that Turnkey represented that the token would not be marketed in a manner that emphasized the potential that its token could increase in value.

The significance of the no action relief is there is now a template as to when a digital asset is not a security.  The SEC in conjunction with announcing the Turnkey no action letter released a statement on Framework for Investment Contract Analysis expressing the Staff’s views to assist market participants in properly analyzing when a digital asset is a security.

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