Shearman & Sterling | Fintech 2020 | SEC Issues No-Action Letter Allowing Sale of Ethereum-Based Tokens 
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  • SEC Issues No-Action Letter Allowing Sale of Ethereum-Based Tokens 
    In a letter dated July 25, 2019, the Securities and Exchange Commission (SEC) Division of Corporation Finance (Division) stated that it would not recommend an enforcement action if a gaming startup, Pocketful of Quarters (PoQ), issues digital tokens on the Ethereum blockchain.  This is the second no-action letter the Division has issued in respect of digital token sales.  The Division’s position effectively will allow PoQ, led by 12-year-old CEO George Weiksner, to sell its Quarters tokens for in-game use immediately upon the launch of its Quarters Platform. 

    The no-action letter states that the Division will not recommend an enforcement action if PoQ, in reliance on the advice of its counsel, determines that the Quarters tokens are not securities, and sells them without registering them under Section 5 of the Securities Act of 1933 or as a class of equity securities under Section 12(g) of the Securities Exchange Act of 1934.  The letter is based on a number of assumptions that include, among other things, that the Quarters tokens must be immediately useable for gaming, may not be traded on secondary markets, can only be traded with “Developers and Influencers with Approved Accounts” (i.e. PoQ) and must be subject to know-your-customer and anti-money laundering requirements. 

    However, the Division cautioned that this no-action position is based only on representations previously made by PoQ, and any changes in facts or conditions could lead the Division to reach a different conclusion.

    The guidance in this no-action letter represents a less restrictive approach than that of its first no-action letter, and the first time that the SEC has permitted the sale of an ERC-20 public blockchain token.  The no-action letter is also a reflection of the SEC’s continued facts and circumstances approach to digital asset regulation and token sales, and it will be interesting to monitor whether the SEC continues to issue no-action letters or plans to issue further guidance in the coming months.