Not all ICOs are Equal

By Tiffany Colt

On April 3, 2019, Turnkey Jet, Inc. became the first business to acquire the ability to sell digital tokens that are not regulated by the U.S. Securities and Exchange commission (SEC). The SEC’s no-action letter stated that the SEC would not bring an enforcement action against Turnkey if it offered, and sold its tokens without registration under the Securities Act and the Exchange Act. Until this no-action letter, the SEC has held in multiple instances that other ICOs, or initial coin offerings, are securities and, therefore, subject to SEC regulation.

An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for virtual currencies like Ether and Bitcoin. Promoters may tell purchasers that the capital raised from sales of the tokens may be used to fund development of a digital platform or software, or other project that the tokens can be used for. ICO’s have existed in a regulatory grey area. Depending on the facts and circumstances, particularly if the promoters suggest that the tokens may increase in value, the ICO may be considered an unregistered offering of securities.

Until the Turnkey no-action letter, the SEC has held that ICOs are securities based on the application of a time-honored test – namely, the Howey test. This three-part analysis, determines when an economic transaction is an investment and therefore a security. Following Howey, an ICO is typically a security if the token’s only purpose is to increase in market value, and an ICO is typically not a security in cases where the tokens give the owner access to a specific protocol or network. The SEC’s no-action letter pertaining to Turnkey, the SEC stated that based on the information provided by the company, Turnkey’s ICO is not a security under Howey. This no-action letter provided some guidance on what type of ICOs would not be considered securities and thus not subject to SEC regulation.

So what factors did the SEC take into consideration when deciding whether Turnkey’s ICO should be classified as a security? Well, the first factor is that those who buy Turnkey’s tokens will not be granted shares of the company. Turnkey is also barred from using the proceeds raised from the sale of its tokens to further its network and the tokens must be instantly usable once they are sold. Additionally, the tokens can only be transferred on the company’s trading platform, purchased at a price of $1, and marketed in a way that establishes the functionality of the token i.e. for air charter services. Therefore, these tokens cannot have the potential to increase in market value.

Turnkey’s ability to sell these tokens free from regulation by the SEC has commenters pondering the benefits and negatives of the SEC’s release. Advocates state that this historical action will give business-travel startup companies the push they need to succeed. Proponents also argue that customers will benefit from a company’s ability to sell tokens in this matter because customers will acquire special benefits i.e., assistance with booking private jets. Others argue that the SEC’s no-action letter fails to provide long-term guidelines for incoming startup companies looking to implement ICOs, arguing that the no-action letter provides no clarity regarding who decides whether an ICO falls under the necessary criteria to avoid federal regulation, and whether companies can explain their ICO model at a later date. While these concerns remain unanswered, one fact is undisputed– the SEC’s no-action letter will likely lead to an increase in ICOs. For investors looking to invest in ICOs it is beneficial to consult the SEC website,, for additional guidance and to avoid any potential fraud.