SEC Grants No-Action Relief to Blockchain Company Pocketful of Quarters (PoQ) for Utility Token Issuance | Practical Law

SEC Grants No-Action Relief to Blockchain Company Pocketful of Quarters (PoQ) for Utility Token Issuance | Practical Law

The SEC Division of Corporation Finance issued a no-action letter stating that a company issuing the digital utility token described in the request would not be required to register the token as a security.

SEC Grants No-Action Relief to Blockchain Company Pocketful of Quarters (PoQ) for Utility Token Issuance

by Practical Law Corporate & Securities
Published on 01 Aug 2019USA (National/Federal)
The SEC Division of Corporation Finance issued a no-action letter stating that a company issuing the digital utility token described in the request would not be required to register the token as a security.
On July 25, 2019, the SEC Division of Corporation Finance (Division) issued a response to a no-action request from Pocketful of Quarters, Inc. (PoQ), stating that the Division will not recommend enforcement action to the SEC if PoQ sells the digital tokens described in the request without registration under the Securities Act and the Exchange Act. PoQ plans to sell digital in-game utility tokens (which it calls Quarters) that can be redeemed across a variety of unrelated participating online video games and to enter certain hosted e-sports tournaments.
In reaching its position, the Division noted several factors that led it to granting PoQ's request for no-action relief, including:
  • PoQ will not use any funds from Quarters sales to build the token platform (Quarters Platform), which has already been fully developed (using proceeds from a separate security token offering) and will be fully functional and operational immediately upon its launch and before any of the Quarters are sold.
  • The Quarters will be immediately usable for their intended purpose (gaming) at the time they are sold.
  • PoQ will implement technological and contractual provisions governing the Quarters and the Quarters Platform that restrict the transfer of Quarters to PoQ or to wallets on the Quarters Platform.
  • Gamers will only be able to transfer Quarters from their Quarters wallets for gameplay to addresses of approved video game developers (Developers) with approved accounts or to PoQ in connection with participation in e-sports tournaments.
  • Only Developers and game marketers with established audiences (Influencers) with approved accounts will be capable of exchanging Quarters for Ether (the digital token exchanged on the Ethereum blockchain) at pre-determined exchange rates by transferring their Quarters to the smart contract.
  • To create an approved account, Developers and Influencers will be subject to know your customer / anti-money laundering (KYC-AML) checks at account initiation as well as on an ongoing basis.
  • Quarters will be made continuously available to gamers in unlimited quantities at a fixed price.
  • There will be a correlation between the purchase price of Quarters and the market price of accessing and interacting with participating games.
  • PoQ will market and sell Quarters to gamers solely for consumptive use as a means of accessing and interacting with participating games.
For more information on the SEC's statements, guidance, and actions related to digital assets, see Practice Note, SEC Regulation of Digital Assets and Practice Note, Security Defined.
For more information on the regulation of blockchain-based businesses generally, see Blockchain Toolkit.