On April 3, 2019, the Securities and Exchange Commission (the “SEC”) staff released a “Framework for ‘Investment Contract’ Analysis of Digital Assets” setting forth its current approach to determining when a digital asset is a security and when it is not. The Framework does not add significantly to the SEC’s prior actions and statements in this area, but sets forth in more detail its analysis. It applies the Supreme Court’s Howey test in determining that the purchase of tokens in a newly created digital platform before the tokens can be used to purchase things on the platform is almost always the purchase of securities, but once the tokens have utility on the platform to acquire goods and services, they are not securities. This comes from an application of the Howey test, especially regarding the expectation of profiting from the efforts of others.
On the same date, the SEC staff provided no-action relief to Turnkey Jet, Inc. (“TKJ”). TKJ is an air chartering business that had set up an on-line platform. TKJ was to sell tokenized “jet cards” to purchase charter services but would not use the revenue from these sales to build the platform The tokens would have a value equal to their sale price and thus could not be used for speculation, and could only be used on the platform to purchase charter services. Under the circumstances, the tokens were not securities.
It is clear that the SEC staff has made a distinction between tokens which are not yet utilized on the platform for which they are intended and those that do have utility, but the SEC staff has not really dealt with all of the iterations of digital tokens and there are a number of questions remaining.