Pocketful of Quarters, SEC No-Action Letter

On July 25, 2019, the SEC issued its second no-action letter in connection with a token sale to Pocketful of Quarters. Pocketful of Quarters is a company founded to address “fragmentation” of in-game credits and currencies in the video game industry through a centralized platform built with blockchain technology. That “fragmentation” results from “siloed video game economies” in which the credits used by players to access exclusive features – whether purchased or earned by playing the game – can be used only within the specific game in which they were purchased or earned. Pocketful of Quarters’ mission is to improve players’ experiences by creating a “universal gaming token” called Quarters that functions as an in-game currency that can be freely used in and transferred among many participating games, as well as e-sports competitions hosted by Pocketful of Quarters. In its no-action letter, the SEC staff confirmed that it would not recommend enforcement action if Pocketful of Quarters sold the Quarters without registration under the Securities Act and the Exchange Act.

The SEC staff identified the following factors as supporting its decision to grant no-action relief: (1) Pocketful of Quarters would not use proceeds from the sale of Quarters to build the Quarters platform, which already had been fully developed and would be fully operational prior to the sale of any Quarters; (2) the Quarters would be able to be used for their intended purpose at the time that they were sold; (3) Pocketful of Quarters would implement various technological and contractual provisions governing Quarters and the Quarters platform that restricted the transfer of Quarters; (4) users would be able to transfer Quarters from their own “wallets” only to developers with approved accounts or to Pocketful of Quarters in connection with e-sports tournaments; (5) only developers and influencers with approved accounts would be capable of exchanging Quarters for ether at a pre-determined exchange rate and approved accounts would be subject to initial and on-going KYC/AML checks; (6) Quarters would be made continuously available in unlimited quantities at a fixed price; (7) there would be a correlation between the purchase price of Quarters and the market price of accessing the relevant features of participating games; and (8) Pocketful of Quarters would market and sell Quarters only for consumptive use within participating games.

The no-action letter again specified that the SEC staff’s position was based on the representations in Pocketful of Quarters’ letter concerning the facts underlying its proposal and that any different facts might require the SEC staff to re-evaluate the application of the securities laws to the proposal and potentially reach a different conclusion.