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The letter of non-action is the first to expressly allow off-platform token transfer to non-users and conversion into fiat currency by token holders.
As cryptocurrency prices rise, we are in the midst of another wave of cryptocurrencies. Given the inexorable flow of news accompanying such periods, it may have been easy to miss the fact that SEC staff recently granted no action relief to another Ethereum-based token, VCOIN.
Only in its third non-action letter to date for digital tokens, the SEC pioneered software development firm IMVU, Inc. to sell VCOIN, an ERC-20 token, as non-transferable security to users of its global platform. In its incoming letter, IMVU said it operates “one of the largest online three-dimensional avatar-based social communities in the world” with “over 7 million monthly active users from more than 140 countries” and “user-generated virtual goods catalog of over 40 million items. “In the same letter, IMVU asked the SEC for guidance on whether its offering of VCOIN required registration under Section 5 of the Securities Act and Section 12 (g) of the Exchange Act.
A simple decision for a simple fact model?
SEC staff issued an affirmative response to IMVU’s request on November 19, 2020, with a number of clauses on which the no-action position is subject. Specifically, the SEC has established eight conditions that IMVU must adhere to for VCOINs, as proposed, to maintain unsafe status. For the most part, the provisions reflect the same Howey-driven requirements enumerated by the SEC in its no-action allowance granted to Pocketful of Quarters, Inc. (PoQ) in July 2019 (discussed in this blog post) and TurnKey Jet, Inc. (TKJ) in April 2019 (discussed in this blog post). These clauses include that VCOIN will be (i) unlimited in supply and sold at a fixed price, with no prospect of appreciation arising from IMVU’s efforts; (ii) be immediately usable for its intended (and not speculative) consumption purpose on a fully functional platform; (iii) have restrictions on purchases, conversions, transfers and trading on the secondary market; and (iv) maintain anti-money laundering (AML) and know-your-customer (KYC) precautions in accordance with the Bank Secrecy Act and AML regulations.
In an era where crypto cool guys are creating ever more exotic and mind-blowing financial instruments in the decentralized finance space, one can be forgiven for seeing the SEC’s approval of a stablecoin with limited transferability as anything less than shocking. . However, it is useful to understand the VCOIN model, especially compared to the TKJ and PoQ models. At the very least, such an exercise allows us to understand the SEC’s trajectory in this area.
Together, the three projects tell a story of regulators who are gradually becoming more permissive. Recall, TKJ described its network as a “private, authorized and centralized blockchain network and smart contract infrastructure managed by TKJ”. Then came the PoQ token, which was issued on Ethereum, a public blockchain network. Unlike the TKJ and PoQ models, the VCOIN no action relief is the first to allow users to transfer a token outside its closed platform to non-users and for any token holder to exchange the token for fiat currency from the token issuer – IMVU in this case.
IMVU’s incoming letter reports that IMVU’s virtual world has over 75,000 “Creators and Service Providers” providing virtual goods and services for IMVU users. Creators and service providers hire non-users (such as programmers, designers, influencers, etc.) “to build, market or provide support related to the virtual goods and services they offer” in the virtual world of IMVU. The introduction of VCOIN allows manufacturers to extract value from the real world in exchange for their activity in the virtual economy of IMVU.
From TKJ to VCOIN token, we see an evolution from a highly limited token issued on a private and centralized blockchain and aimed at a narrow user base (private jet charter) to a public blockchain token for a platform with 7 million users that they are able to transfer the token off-platform to non-users, albeit with some paid disincentives to discourage speculation. We can’t wait to see how this trend holds up in future ban letters.
Progress in the virtual world, stagnation in the real world
Given the growing list of regulatory issues raised by the crypto space, the need for a complete picture of digital assets has become more pressing. As widely expected, regulatory uncertainty in the United States has allowed other nations more hospitable to digital asset innovation to begin advancing a technology that some claim will be as transformative as the Internet.
