On December 11, 2017, the SEC issued a cease-and-desist order against Munchee Inc. after finding that the company’s initial coin offering (“ICO”) constituted unregistered offers and sales of securities. Munchee sought to raise $15 million for its blockchain-based food review and social platform by selling digital tokens to users that could be used to buy and sell goods and services through an iPhone app. Munchee and others promoting the ICO told investors that the tokens could be expected to increase in value as the company implemented improvements to the app and said that the company would work to support a secondary market for the tokens.
The SEC investigated the matter and found that the tokens were securities, and Munchee was in violation of securities laws by conducting unregistered offers and sales. The DAO Report of Investigation, previously issued by the SEC, had found that a token can be a security under certain circumstances and be subject to securities laws. In this case, such circumstances were present due to the fact that investors would have had a reasonable belief that investing in the tokens could generate returns.
After being contacted by the SEC, Munchee halted its ICO and refunded investors’ money before any tokens were delivered. Due to Munchee’s cooperation and its quick action to end the ICO and return funds, the SEC chose not to impose a penalty.
The SEC’s newly formed Cyber Unit, whose creation was announced in September, played a role in investigating the case. With the SEC now devoting more attention to enforcement in this area, companies seeking to raise money through ICOs or similar transactions should consult counsel in order to determine the applicability of securities laws and ensure compliance. Given the increasing popularity of blockchain technology and the use of ICOs to fund new ventures in this area, companies should be aware that they may unwittingly find themselves in violation of securities laws if they fail to seek proper guidance.