What Does the SEC’s Second No-Action Letter Mean for ICOs?

It’s the latest dispatch from the government agency notoriously ambivalent about crypto.

Last week, the SEC issued its second ever no-action letter for an ICO. The no-action letter, sent to the owners of the gaming app Pocketful of Quarters (PoQ), means that the agency will not take steps to force the startup to register its tokens, which are based on the ERC-20 protocol, as securities. The agency issued its first no-action letter for ICO tokens to TurnKey Jet, a private aviation company, back in April.

No-action letters are significant for the agency, which has been cracking down on startups masquerading securities as utility tokens, primarily for their scarcity to date. SEC Chairman Jay Clayton previously declared that all tokens issued on the Ethereum blockchain are securities.

The regulatory status of ICO tokens has been the subject of much debate and consternation for entrepreneurs. Even as the market for ICOs has expanded, the SEC has generally refused to provide guidance regarding the status of such tokens. Whereas securities require extensive disclosure and compliance with regulatory agencies, utility tokens can get by with very little documentation and oversight.

Early on, the simplicity of the ICO process and the fact that it functioned largely outside the agency’s purview attracted rogue entrepreneurs attempting to slip securities past the SEC by disguising them as utility tokens. This provoked warnings and a crackdown by the agency, leading to a cooling of the red-hot ICO market.

Pocketful of Quarters 

This time around, the agency has adopted what seems to be a more forgiving stance. The SEC letter to Pocketful of Quarters stated, “Based on the facts presented, the Division will not recommend enforcement action to the Commission if, in reliance on your opinion as counsel that the Quarters are not securities, PoQ offers and sells the Quarters without registration under Section 5 of the Securities Act and does not register Quarters as a class of equity securities under Section 12(g) of the Exchange Act.”

Pocketful of Quarters was founded by an 11-year-old avid gamer named George Weiksner. Michael Weiksner, George’s father, is the company’s CTO. The app has two tokens: Q1 and Q2. The Q1 token is an in-game currency that can be used across multiple games, ensuring that the balance from one is transferable to another.

George told Coindesk that Q1 is a stablecoin. This means that its value will remain stable with respect to a fiat currency. Only developers and certain “influencers” are allowed to earn revenue from Q1. They can do so by exchanging Quarters for Ether. Players are not allowed to profit from or resell the currency in open markets, and it will not be listed on crypto exchanges. PoQ is also responsible for KYC provisions.

A Sign of Changing Times? Experts Weigh in. 

So, does the SEC’s latest missive change the game? Can we expect a reinvigorated market for tokens?

Probably not. In announcing its no-action letter, the SEC warned that the status of Quarters would be closely monitored, and that the agency would take action should the token be found in violation of existing securities laws.

“This response expresses the Division’s position on enforcement action only and does not express any legal conclusion on the question presented or on the applicability of any other laws, including the Bank Secrecy Act and anti-money laundering and related frameworks,” wrote Jonathan Ingram, the SEC’s chief legal officer at FinHub.

Still, it does display greater nuance in the agency’s stance. “The thing that’s notable here, this is the first ERC-20 public blockchain token [approved for sale],” Lewis Cohen of DLX Law told Coindesk.

Marco Santori, chief legal officer at Blockchain.com, also chimed in on the letter in a lengthy tweetstorm, drawing a distinction between the agency’s previous letter issued to TurnKey and this one. TurnKey’s tokens were similar to airline credit miles, and customers could use them to earn rewards on the platform. But they could also use the tokens on other platforms, meaning other private aviation companies did not accept the tokens. In the case of PoQ, $Q1 can be used outside its own platform in other games. To that extent, the SEC’s decision to look beyond closed systems and allow mobile tokens, such as the one issued by PoQ, represents an evolution in the agency’s thinking. Or, as Santori calls it, “regulatory baby steps.”

PoQ has also issued another set of security investment tokens that are intended to generate profits for investors. It’s fair to assume that any promise of profit from that offering has come at a hefty cost to PoQ in the form of fees and expenses.

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