POQ No-Action Letter: DLT “Arcade Tokens” Aren’t Securities

Blockchain & E-Transactions Law

Last week, the SEC’s Corporate Finance division issued its second no-action letter supporting a digital token issue.  On July 25, 2019, the Staff agreed it would not recommend enforcement action over the issuance of Quarters tokens for online gaming.

The issuer, Pocketful of Quarters, Inc. (“POQ”), states its use case as addressing “in-game currency fragmentation” by creating a “universal gaming taken” to solve “the inability to use gaming credits, coins or other units of value purchased in, or earned playing, one online video game in other online games.”

The POQ ecosystem involves two smart contracts, Quarters Smart Contract and Q2 Smart Contract, and two tokens, Quarters and Q2 Tokens.  POQ’s request letter sought no-action assurance only for Quarters, admitting that the previously-offered Q2 Tokens were “securities” having secured investments used to build the ecosystem.

Quarters will be sold through the POQ website, where users can register a hot wallet and buy the tokens with USD, or by sending ETH directly to their wallet.  POQ committed that the ecosystem will be fully functional when launched (i.e. before Quarters tokens available) and that no Quarters proceeds will be used for system development.  Instead, the Quarters tokens will be used immediately for gaming by consumers when offered, and only for in-game purchases in Participating Games or participation in e-sports tournaments. Quarters will have no value outside POQ or Participating Games on the POQ platform.  Proceeds from the sales will be used largely to compensate developers and influencers in connection with Participating Games, with a small portion of proceeds returned to prior Q2 Token investors.  Quarters will be issued in unlimited supply at a fixed price, without any opportunity for secondary market trading.

Developer/Influencer Approved Accounts eligible to receive Quarters are subject to AML/KYC compliance efforts.

Neither the incoming letter nor the Staff’s response called Quarters a “utility token,” part of a shift away from malleable labels toward a fully functional approach.

The no-action response perhaps was presaged by Commissioner Peirce’s references to “arcade tokens” in a fully functional ecosystem, during an address in May 2018.  See Commissioner Peirce, “Beaches and Bitcoin:  Remarks before the Medici Conference” (May 2, 2018) (referring to arcade tokens in a fully functional ecosystem), here.

The incoming request is here.

The Staff’s No-Action Letter, here.

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