On July 25, 2019, the U.S. Securities and Exchange Commission (“SEC”) issued a “no-action” letter to Pocketful of Quarters, Inc. (“PoQ”) for its Ethereum ERC-20 token “Quarters.” The no-action letter—the second letter issued by the SEC this year—assures PoQ that the SEC will not seek any enforcement action. PoQ is a blockchain startup led by CEO George Weiksner, age 12, and his father Michael Weiksner who serves as the company’s CTO. These digital tokens serve as prizes for completing in-game achievements. Due to the limited nature of the token, the SEC determined that Quarters do not constitute a security, and thus not subject to Section 5 of the Securities Act and Section 12(g) of the Exchange Act.
In making its determination, the SEC explained that Quarters must be useable only for gaming purposes and cannot be sold by players. More specifically, the SEC noted several key positions, including:
- PoQ will not use any funds from Quarters sales to build the Quarters Platform, which has been fully developed and will be fully functional and operational immediately upon its launch and before any of the Quarters are sold.
- The Quarters will be immediately usable for their intended purpose (gaming) at the time they are sold;
- PoQ will implement technological and contractual provisions governing the Quarters and the Quarters Platform that restrict the transfer of Quarters to PoQ or to wallets on the Quarters Platform.
- Gamers will only be able to transfer Quarters from their Quarters Hot Wallets for gameplay to addresses of Developers with Approved Accounts or to PoQ in connection with participation in e-sports tournaments.
- Only Developers and Influencers with Approved Accounts will be capable of exchanging Quarters for ETH at pre-determined exchange rates by transferring their Quarters to the Quarters Smart Contract.
PoQ seeks to bridge the gaming and blockchain world by creating digital tokens that can be used on a virtual platform. As digital gaming continues to grow at a rapid pace, the use case of blockchain technology will likewise continue to gain traction. This past weekend at the Fortnite World Cup, for instance, 16-year-old Kyle Giersdorf won $3 million after taking top prize at the tournament. The SEC’s decision to issue a no-action letter only paves the way for more regulatory clarity for gaming startup companies.