Want in on a secret? There have been at least three SEC-approved tokens out in the U.S. market, which might be hard to believe based on the headlines, lawsuits, and restrictions we’ve become accustomed to.
So how did these tokens get the SEC’s stamp of approval? It’s all due to a little-known piece of publicly available guidance called “no-action letters.”
By following the steps and guidance laid out in the no-action letters, you can also design a compliant token that accomplishes your needs and avoids security registration requirements.
What is a No-Action Letter?
Suppose an individual or entity is unsure whether a particular product, service, or action would violate the federal securities law. In that case, they may request what’s called a no-action letter, which is a written notice from a regulatory authority (i.e., the SEC) intended to help the requesting company determine whether their business actions would or would not trigger regulatory action. In some cases, the letter will simply let the requesting party know that the regulatory authority will not take action against them if they engage in the activity or transaction specified in the letter.
Agency guidance like no-action letters help fill in the knowledge gaps that inevitably exist when companies try to interpret the SEC’s oft-cryptic and dated regulations. Thus, no-action letters can prove extremely useful to lawyers and companies trying to comply with the law.
So why aren’t no-action letter requests more common? There are legitimate reasons companies do not seek no-action letters, which likely explains why so few organizations seem to know they exist. First, the government agency might simply deny the request. In that case, the client has effectively alerted the regulator that it is taking (or plans on taking) actions that would not be in compliance with the law.
Second, seeking a letter — whether or not a company is successful — is an expensive legal proposition. The requesting company must retain legal counsel, and relevant government staff must learn extensively about the request and requester. During that time, there’s a significant risk that a less cautious competitor will beat the company to market.
No-Action Letters are Fact Specific
The no-action letters are quick to point out that “any different facts or conditions might require the division to reach a different conclusion.” That means what works for one company may not work for another. That being said, you should take comfort if your company can replicate or come close to the facts laid out in a no-action letter.
A Brief Overview of the SECs No-Action Letters
The SEC has issued three no-action letters to token issuers:
- TurnKey Jet, Inc., a charter jet company, was allowed to issue TKJ Tokens to let users buy and sell charter jet flights on their platform (4/3/2019).
- Pocketful of Quarters, Inc., a video game company, was allowed to issue “Quarters” that allowed access to online games (7/25/2019).
- IMVU, Inc., a social media company, was allowed to issue online Credits for an avatar based online economy (11/17/2020).
While the facts and product differ, here is a summary of some important lessons and similarities between the three:
*This feature was not indicated as a requirement in the no-action Letter but was a feature of the platform.
Launch Tokens that Check All the Boxes with Co:Create
So what can these no-action letters teach us about launching compliant tokens, and how can these learnings be applied in a general purpose context?
If you look at the commonalities across the three letters, you start to see a pattern emerge. In many ways, these examples resemble tokenized loyalty and reward programs. The goal is to encourage and reward specific behaviors in a more controlled (read “non-speculative”) way.
For a company that has similar goals, they can incorporate the following features into their token design to address regulatory concerns:
- Transfer restricted, meaning that there is not a secondary market for the token
- Immediately usable on loyalty type rewards (such as access passes, voting, product discounts, etc.)
- Minted and redeemed on demand (i.e. an uncapped and floating supply)
Put another way, we believe a company, which may want to distribute tokens to their community as part of a loyalty program, can rely on the SEC no-action letters. In particular, we believe successful on-chain loyalty and reward programs could follow the Pocketful o’ Quarters model mentioned above.
At Co:Create, our mission is to help you activate your community by leveraging the power of web3 as seamlessly as possible. Whether it’s through web3 identity management, wallets, or loyalty tokens, we make it simple. If the current SEC-compliance landscape is any indication, launching complaint tokens right now is an increasingly complicated process plaguing web3 adoption. But these no-action letters present a path forward and we want to help you take advantage of it.
If you’re a brand looking to set yourself apart from the pack, enter the web3 space, and kickstart a community-powered loyalty program, we can help you get your token off the ground and into the wallets of your community — compliantly.
With Co:Create’s flexible APIs — you can launch tokens that check the required boxes above with immediate functionality, transfer restrictions, and other necessary requirements. We put the power of design in your hands. Even better, our infrastructure is flexible enough to let you change design requirements as your program evolves and its needs change.
For more on why web3-enabled loyalty and tokens can benefit you, check out our Loyalty Guide on building community-driven, gamified reward experiences. We got you covered.
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The information provided in this blog post is intended for general informational purposes only and should not be construed as legal advice. Co:Create is not your lawyer and has not provided legal advice tailored to your specific situation. If you have any legal questions or concerns related to your loyalty program or any other aspect of your business, you should seek the advice of your own legal counsel. The use of this blog post or any information contained herein does not create an attorney-client relationship between you and Co:Create.