On April 3, 2019, Finhub, the SEC’s Strategic Hub for Innovation and Financial Technology, released the “Framework for ‘Investment Contract’ analysis of digital assets” (the “Framework”) providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security. The same day, the SEC’s Division of Corporation Finance (the “Division”) published its first No-Action Letter on digital tokens. The No-Action Letter applies the Framework to a digital asset created by Turnkey Jet, Inc. (“Turnkey Jet”), a company that provides interstate air charter services.
The Framework, which identifies factors market participants should consider in assessing whether a digital token is a security, limits the possible uses of utility tokens. In the Framework, Finhub confirms that SEC v. Howey, the seminal Supreme Court case for determining whether an instrument meets the definition of a security, should be applied to determine whether a digital token is a security. Thus, digital tokens are considered securities if there is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The Framework highlights the fact that usually the main issue under the Howey test in the context of digital assets is whether a purchaser has a reasonable expectation of profits to be derived from the efforts of others and proposes a long list of characteristics that market participants may take into account to make that determination. In the No-Action Letter published the same day, the Division based its decision on the characteristics listed in the Framework.
The No-Action Letter indicates that the Division will not recommend enforcement action to the Commission if Turnkey Jet offers and sells digital tokens without registration under the Securities Act and the Exchange Act, confirming that utility tokens exist in the American landscape of digital assets. The Division based its decision on six very restrictive characteristics of the token:
1. The platform used to sell the tokens will be fully developed and operational at the time of the sale. The funds from sales will not be used to develop the platform.
2. The tokens will be immediately usable for their intended functionality (purchasing air charter services).
3. The tokens will be transferable on the internal platform only.
4. The tokens will be sold at the same price throughout the existence of the company.
5. The company will offer to repurchase tokens only at a discount of the face value.
6. The tokens are marketed in a manner that emphasizes the functionality of the token and not the potential for the increase in market value.
Thus, to be considered a utility token and not a security, a token must be for consumption only. Utility tokens appear to be very similar to gift cards: a prepaid store-valued token to be used as an alternative to cash for purchases within a particular company. One may ask, however, why anyone would prepay for a good or service if there are no discounts associated with the purchase and no secondary market on which the service or good can be traded and accrete in value. In the Turnkey Jet case, the main advantage is that the payment settlement via blockchain allows for a more efficient settlement than via the traditional banking system. A payment that would only take seconds on the blockchain could take significantly longer with the traditional banking system.
Under the guidance provided by the Framework and the Turnkey Jet No Action Letter, it is clear that most uses of digital tokens will be limited and the vast majority of digital tokens will fit within the definition of a “security,” and therefore will be subject to federal securities laws that require all offerings and sales of securities either to be registered or qualify for an exemption from registration. Utility tokens have a limited scope: they may not be used to raise capital for an enterprise, may be offered and sold only on a platform that is fully built at the time of the offering, and may not be transferred outside of that platform.
1 Digital assets are assets issued and transferred using distributed ledger or blockchain technology, including security tokens and utility tokens.
2 SEC v. Howey Co., 328 U.S. 293 (1946)
3 In a report published in July 2017 entitled Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, the SEC pronounced that the Howey test should be applied to determine whether a digital token is a security token.
Can I Raise Venture Capital as a Public Benefit Corporation?
By Ben Stone
As societies and markets increasingly insist that corporations generate positive social impact alongside profit, investors have taken notice. The global impact investing market alone, for instance, doubled from $114 billion in 2017 to $228 billion in 2018, and will almost certainly continue to accelerate. 
In the face of this encouraging trend, many entrepreneurs are starting for-profit companies with a social mission. But many find that the traditional corporate form, the C-Corporation, does not adequately protect a company’s commitment to generating both profits and positive impact. As a result, many companies are incorporating as Public Benefit Corporations (“PBCs”), a legal corporate form established in Delaware in 2013 that is now gaining mainstream acceptance. Most notably, as a PBC, a company may make business decisions based not just on the economic interests of its shareholders (as required by the C-Corporation), but based also on (a) the best interests of those materially affected by its conduct (like employees, customers, communities and the environment) and (b) a specific “public benefit” identified in the company’s certificate of incorporation (like combating hunger or increasing access to education).
Incorporating as a PBC can be advantageous for a mission-driven company. A PBC can help codify your strategy to focus on the long-term sustainability of the business and its social impact; help you tap into a skyrocketing market demand for products and services that are making a positive difference in the world; and supercharge your talent recruitment process and employee loyalty. Indeed, more than 4,000 companies have incorporated as PBCs, including major brands like Patagonia and Kickstarter.
You’re probably thinking, “Wow, that sounds terrific. Why wouldn’t I incorporate as a PBC?”
The most typical hesitation is the assumption that operating as a PBC will hinder a company’s ability to secure critical startup and growth financing. This is not an unfounded concern. For emerging companies that are not yet able to generate significant revenues, angel and venture capital investors can hold the keys to survival, and these investors are often averse to changing how they do things. The good news, however, is that many mainstream investors are investing in PBCs.  And if you follow these general guidelines, your PBC should be well-positioned to successfully access this capital:
Educate investors. Despite their recent rise in prominence, PBCs are still nascent legal entities, and early-stage investors might hesitate when they have always invested in C-Corporations. As a result, you must proactively educate potential investors about the positive legal and commercial ramifications of the PBC form. 
Incorporate in Delaware. The strong preference of most early-stage investors is to invest in corporations organized in Delaware; the rules are predictable, business-friendly and backed by extensive case law. While thirty-three states have created their own form of the PBC, Delaware, not coincidentally, sought to develop the least restrictive version of the PBC. Make it easier for investors to say “yes” by incorporating your PBC in Delaware.
Create an amazing Benefit Report. One of the chief differences between C-Corporations and PBCs is the requirement that PBCs provide stockholders with a report that (a) details how the Board intends to balance the best interests of the stockholders, its articulated public benefit and other stakeholders, and (b) assesses the company’s success meeting these objectives. It makes sense that a scrappy, cash-strapped young company might turn this into a quick check-the-box exercise. But that would be a mistake. Lean into the reporting process and create a document that inspires, informs and persuades. It will set you apart. 
Run a tight ship. This is a universal point for all early-stage companies, but particularly relevant for PBCs, which have a heightened incentive to demonstrate that they are as buttoned up as any other for-profit company. You should prioritize well-organized corporate records; robust financial controls and company policies; a diverse board and leadership team; and transparent, proactive corporate governance. Don’t give investors wiggle room to view your PBC as anything but a finely-tuned machine.
Show them the money! This is by far the most important point. Skeptical investors might argue that achieving profits and positive impact are incompatible goals, and that companies need to choose one or the other. Change their minds by making a detailed case that your PBC will not just make the world a better place, but how it will also generate returns that meet or exceed the returns from a more typical venture-backed company.
If you can integrate these guidelines into your PBC’s fundraising strategy, you will be well on your way to raising transformative capital. Moreover, you will align with investors who have adopted your values and long-term strategy, a recipe that will help generate both profits and impact for decades.
If you have questions about PBCs, startups, social innovation, or the law, please reach out to me at bdstone (at) mintz.com.
 – I am currently compiling a comprehensive list, which I will make publically available. Please contact me with investment companies to include!
 – Some helpful resources:
Alexander, Frederick H, et al. “Public Benefit Corporations (DE).” Practical Law, Practical Law
Alexander, Frederick H. Benefit Corporation Law and Governance: Pursuing Profit with Purpose. Berrett-Koehler Publishers, Inc., 2017.
Bailey, Christina S, and William S Perkins. “Liability Considerations for Delaware Public Benefit Corporations.” MintzEDGE, MintzEDGE, 19 Sept. 2018.
“Benefit Corporation.” Benefit Corporations Raising Capital, Benefit Corporation.
Kannel, Charlie, and Tumml. “Startups: Should You Incorporate as a Public Benefit Corporation?” VentureBeat, VentureBeat, 30 Apr. 2017.
“Annual Benefit Corporation Report.” Patagonia, Patagonia, 2017.
“Kickstarter PBC 2017 Benefit Statement.” Kickstarter, Kickstarter, 2017, kickstarter.com/year/2017/benefit-statement.
Verheyden, Maxime. “Public Reporting by Benefit Corporations: Importance, Compliance, and Recommendations.” Hastings Business Law Journal, vol. 14, no. 1.