United States: SEC Issues Historic No-Action Letter And Releases Framework For "Investment Contract" Analysis Of Digital Assets

On April 3, 2019, the Strategic Hub for Innovation and Financial Technology (“FinHub”) of the U.S. Securities and Exchange Commission (“SEC”) published two pieces of guidance on when a blockchain-enabled digital asset will, or will not, be considered a security.

The first piece of guidance (the “TKJ No-Action Letter”) was a no-action letter1 issued by the SEC’s Division of Corporation Finance in response to a request2 from TurnKey Jet, Inc. (“TKJ”), a Florida-based air carrier and air taxi operator. The TKJ No-Action Letter represents the first time that the SEC staff has indicated that it would not recommend enforcement action to the SEC if, in reliance on counsel’s opinion that the digital assets are not securities, the subject entity offers and sells securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The second piece of guidance came in the form of a “Framework for ‘Investment Contract’ Analysis of Digital Assets”3 that is intended to serve as “an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.”4


U.S. federal securities laws apply to a digital asset if the digital asset is deemed a “security” under these laws. Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange each provide a list of instruments captured by the term. Although the lists have some minor differences, they both include an “investment contract.”

To determine whether an instrument is an “investment contract,” the SEC and U.S. federal courts generally apply the test outlined by the U.S. Supreme Court in SEC v. W.J. Howey Co.—the so–called Howey test. Under the Howey test, an instrument is deemed an “investment contract” if there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.5

The SEC has applied the Howey test to blockchain-enabled digital assets to determine whether such assets are securities, making clear that “whether or not a particular transaction involves the offer and sale of a security—regardless of the terminology used—will depend on the facts and circumstances, including the economic realities of the transaction.”6

The TKJ No-Action Letter

The TKJ No-Action Letter indicates that, in certain cases, the SEC staff will not recommend enforcement to the SEC if a digital token issuance does not constitute an offering of securities.

As described in TKJ’s letter to the SEC staff requesting no-action relief (the “TKJ Incoming Letter”), TKJ proposes to offer and sell blockchain-based digital tokens in order to facilitate air charter services through a membership platform. TKJ’s platform would enable consumer members of the program to purchase tokens, which could then be used in exchange for air charter services from the air carrier members; broker members would also facilitate such transactions.

In response, the SEC staff states in the TKJ No-Action Letter, that it will not recommend enforcement action to the SEC if, in reliance on the opinion of TKJ’s counsel that the tokens are not securities, TKJ offers and sells the tokens without registration under the Securities Act and the Exchange Act. In reaching this position, the SEC staff particularly noted that:

  • TKJ will not use any funds from token sales to develop the TKJ token platform, blockchain network, or application, and each of these will be fully developed and operational at the time any tokens are sold
  • The tokens will be immediately usable for their intended functionality (i.e., purchasing air charter services) at the time they are sold
  • TKJ will restrict transfers of tokens to TKJ wallets only, and not to wallets external to the TKJ platform
  • TKJ will sell Tokens at a price of $1 per token throughout the life of the program, and each token will represent a TKJ obligation to supply air charter services at a value of $1 per token
  • If TKJ offers to repurchase tokens, it will only do so at a discount to the face value of the tokens, unless a court within the United States orders TKJ to liquidate the tokens
  • The token is marketed in a manner that emphasizes the functionality of the token, and not the potential for the increase in the market value of the token7

Consistent with any other no-action response, the SEC staff noted that its position is based on the representations made in the TKJ Incoming Letter, and that any different facts or conditions might require a different conclusion. The SEC staff also noted that the letter represented the Division of Corporation Finance’s position on enforcement action only and does not express any legal conclusion on the question presented.

In the TKJ Incoming Letter, TKJ’s counsel presented an analysis of the TKJ token under the Howey test in support of counsel’s opinion that “the proposed sale of Tokens under the TKJ program will not involve the sale of a ‘security’ within the meaning of Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, and, therefore, that registration under the Securities Acts is not required.” Counsel to TKJ also concluded that the tokens did not constitute an “investment contract,” a “note,” “evidence of indebtedness,” or any other form of security under the Securities Act or Exchange Act.

The TKJ Incoming Letter’s Howey Analysis

Investment of Money

According to the TKJ Incoming Letter, the first prong of the Howey test—i.e., whether or not there is an “investment of money”—is satisfied because the tokens will be sold by TKJ for value ($1 per token).

Common Enterprise

According to the TKJ Incoming Letter, the second prong—i.e., the existence of a “common enterprise”—is satisfied because TKJ is proposing to offer the tokens to create an ecosystem of air charter services where consumers, brokers and carriers members can collectively use the platform to connect with each other for such services.

Reasonable Expectation of Profits

The TKJ Incoming Letter’s main area of focus is the third prong of the Howey test— i.e., whether a purchaser of tokens has a “reasonable expectation of profits” through the enterprise—is not satisfied. In concluding that TKJ token purchasers could not reasonably expect to make a profit, the TKJ Incoming Letter highlights, among other things, the following:

  • TKJ’s use of proceeds from the token sales will not be applied to the development of the TKJ platform, network, or application, but instead, will be held in escrow to pay carrier and broker members for services
  • TKJ proposes to market the token’s functionality for access to services, not the potential for any increase in the price of the token
  • TKJ’s limitations on tradability, price volatility, and repurchase premiums discourage token holders from trading the tokens at any price above $1 and prevent the development of a resale market for the token

Reliance on the Efforts of Others

According to the TKJ Incoming Letter, the fourth Howey prong— i.e., “reliance on the efforts of others”—is also not satisfied because purchasers would not be relying on TKJ’s efforts to develop the platform or network and those efforts would not affect the success of the platform. The TKJ Incoming Letter notes, among other things, that:

  • TKJ proposes to set up its membership program not so that members can rely primarily on TKJ’s efforts, but instead so that members can rely on other members’ efforts
  • TKJ does not play a central role in the primary operations of the platform, which will be fully operational at the time tokens are sold

The TKJ Incoming Letter’s Reves Analysis

Beyond the Howey test, the TKJ Incoming Letter also included counsel’s opinion that, under the family-resemblance standard established in Reves v. Ernst & Young8, the TKJ tokens were not securities because, as open-account debt, they bear a strong resemblance to instruments traditionally excluded from the definition of a “security” under the Securities Act and Exchange Act.9

Implications of the TKJ No-Action Letter

The TKJ No-Action Letter is historic, in that it represents the first time no-action relief has been granted to a token issuer by the SEC staff. Projects that have used, or are considering using, tokens as part of a new service or platform should carefully consider the applicability of the SEC staff’s guidance.

The SEC’s “Framework for ‘Investment Contract’ Analysis of Digital Assets”

In order to provide more general guidance clarifying which offers and sales of digital assets constitute offers and sales of securities, FinHub published the Framework for analyzing whether a digital asset is an investment contract and whether offers and sales of such assets are transactions to which U.S. federal securities laws apply. The Framework sets forth the four key factors outlined in the Howey test and discusses each one in turn.

The Investment of Money in a Common Enterprise

The Framework very briefly explains that the first two prongs of Howey have typically been met in the offer and sale of blockchain-enabled digital assets because the digital assets have (i) been acquired in exchange for value and (ii) involved a “common enterprise.”10

Reasonable Expectation of Profits

The Framework provides significant guidance relating to the “reasonable expectation of profits derived from efforts of others” prong of the Howey test.11 The Framework notes that “a purchaser may expect to realize a return through participating in distributions or through other methods of realizing appreciation on the asset, such as selling at a gain in a secondary market” and that “when a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an ‘Active Participant’ or ‘AP’) provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met.”12

The Framework provides several examples where there is likely a reasonable expectation of profits. For example, it states that, while not determinative, the stronger the presence of the following, the more likely there is a reasonable expectation of profits:

  • The digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future
  • The digital asset is offered broadly to potential purchasers as compared to being targeted to expected users of the goods or services or those who have a need for the functionality of the network
  • The digital asset is offered and purchased in quantities indicative of investment intent instead of quantities indicative of a user of the network
  • The AP has raised an amount of funds in excess of what may be needed to establish a functional network or digital asset.13

The Framework notes that, to assess whether there is a reasonable expectation of profits, federal courts often consider whether an instrument is offered and sold for use or consumption by purchasers. For example, it states that, while not determinative, the stronger the presence of the following, the less likely the Howey test is met:

  • The distributed ledger network and digital asset are fully developed and operational
  • Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use
  • The digital assets’ creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network
  • Prospects for appreciation in the value of the digital asset are limited
  • With respect to a digital asset referred to as a virtual currency, it can immediately be used to make payments in a wide variety of contexts, or acts as a substitute for real (or fiat) currency.14

Reliance on the Efforts of Others

The Framework notes that there are two key questions with respect to the “reliance on the efforts of others” analysis:

  • Does the purchaser reasonably expect to rely on the efforts of an AP?
  • Are those efforts “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” as opposed to efforts that are more ministerial in nature?15

For example, it states that, while not determinative, the stronger the presence of the following, the more likely that a purchaser is relying on the efforts of others:

  • There are essential tasks or responsibilities performed and expected to be performed by an AP, rather than an unaffiliated, dispersed community of network users (commonly known as a “decentralized” network)
  • An AP creates or supports a market for, or the price of, the digital asset. This can include, for example, an AP that: (1) controls the creation and issuance of the digital asset; or (2) takes other actions to support a market price of the digital asset, such as by limiting supply or ensuring scarcity, through, for example, buybacks, reducing token supply based on use (or “burning”), or other activities
  • An AP has a lead or central role in the direction of the ongoing development of the network or the digital asset. In particular, an AP plays a lead or central role in deciding governance issues, code updates, or how third parties participate in the validation of transactions that occur with respect to the digital asset.16

Implications of the Framework

Although not a “rule, regulation, or statement of the Commission,”17 the Framework provides useful insight into the SEC staff’s analysis of whether transactions involving blockchain-enabled digital assets are investment contracts within the meaning of U.S. federal securities laws.

Key Takeaways and Conclusion

The TKJ No-Action Letter and the Framework, taken together, provide helpful guidance by the SEC staff to blockchain-enabled digital asset market participants. Although the new guidance reinforces or restates a number of points that have been made by the SEC staff previously,18 and the facts behind the TKJ No-Action Letter request are uncommon in the digital asset market, the guidance also marks the first time that the SEC staff has provided no-action relief with respect to the offer and sale of a particular token. Going forward, we expect market participants will find this guidance useful as they seek to determine whether particular tokens hew more closely to the facts of TKJ’s token offering, or those of token offerings that are characterized as investment contracts.


1 TurnKey Jet, Inc., SEC No-Action Letter (Apr. 3, 2019), available at https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.html.

2 TurnKey Jet, Inc., SEC No-Action Letter (Apr. 2, 2019), available at https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1-incoming.pdf.

3 SEC’s Framework for “Investment Contract” Analysis of Digital Assets (Apr. 3, 2019), available at https://www.sec.gov/files/dlt-framework.pdf.

4 Director of Division of Corporate Finance William Hinman and Senior Advisor for Digital Assets and Innovation Valerie Szczepanik, SEC Public Statement (Apr. 3, 2019), available at https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets.

5 328 U.S. 293 (1946).

6 See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (the “DAO Report”), available at https://www.sec.gov/litigation/investreport/34-81207.pdf

7 TKJ No-Action Letter.

8 494 U.S. 56 (1990).

9 TKJ Incoming Letter at 12-13.

10 Framework at 2.

11 Framework at 2.

12 Framework at 2-3.

13 Framework at 6-7.

14 Framework at 8.

15 Framework at 3.

16 Framework at 4.

17 Framework at 11 n.1.

18 See, e.g., DAO Report; Munchee, Inc., Securities Act Rel. No. 10445 (Dec. 11, 2017) (settled order); Paragon Coin, Inc., Securities Act Rel. No. 10574 (Nov. 16, 2018); Carriereq, Inc., d/b/a Airfox, Securities Act Rel. No. 10575 (Nov. 16, 2018).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions