The Securities and Exchange Commission (SEC) has shut down an Initial Coin Offering (ICO) as conducting an unregistered securities offering. This is the first time the SEC has has halted an ICO where there were no allegations of fraud representing a new shift in approach by the Enforcement Division of the SEC. At the end of November, the SEC Head of CorpFin stated more enforcement actions were forthcoming. The Munchee shutdown is perhaps the first of many to come.
Munchee, a blockchain-based food review service, was seeking $15 million for an App centered on restaurant meal reviews to create an “ecosystem” in which Munchee and others would buy and sell goods and services using the tokens. Munchee apparently agreed to the SEC action after being contacted by the Feds without admitting or denying the findings. Munchee has reportedly refunded all investor proceeds after the SEC intervened. Munchee commenced the refunds several weeks ago to “ensure it is in compliance with applicable laws/regulations.”
Hi everyone, Munchee, Inc. has elected to close its current token offering to ensure it is in compliance with applicable laws/regulations.
— Munchee Platform (@MuncheePlatform) November 3, 2017
Similar to most ICOs, Munchee communicated through its website (since shutdown), a white paper, and other means that it would use the proceeds to create the ecosystem, including eventually paying users in tokens for writing food reviews and selling both advertising to restaurants and “in-app” purchases to app users in exchange for tokens.
In the course of the offering, the company and other promoters emphasized that investors could expect that efforts by the company and others would lead to an increase in value of the tokens. Munchee also said it would take steps to create and support a secondary market for the tokens. The SEC said because of these and other company activities, investors would have had a reasonable belief that their investment in tokens could generate a return on their investment.
“We will continue to scrutinize the market vigilantly for improper offerings that seek to sell securities to the general public without the required registration or exemption,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “In deciding not to impose a penalty, the Commission recognized that the company stopped the ICO quickly, immediately returned the proceeds before issuing tokens, and cooperated with the investigation.”
Steven Peikin, Co-Director of the SEC’s Enforcement Division, added that their primary focus remains investor protection.
“[We are] making sure that investors are being offered investment opportunities with all the information and disclosures required under the federal securities laws.”
This latest action was originated in the SEC’s new Cyber Unit that is focused on the Blockchain and ICO space. The action is consistent to the messaging coming from the SEC over the past few months following the DAO report and statements by SEC Chair Jay Clayton that issuers must file an appropriate exemption if they intend on soliciting investors in the US.
Lewis Cohen, a securities attorney at Hogan Lovells and part of the Wall Street Blockchain Alliance, told Crowdfund Insider;
“With today’s one-two punch of the Munchee token sale cease-and-desist order and Chairman Clayton’s personal statement on cryptocurrencies and initial calling offerings, the market finally gets a much-needed injection of clarity from the SEC. Chairman Clayton’s statement in particular shows the nuanced thinking of a former Wall Street lawyer now charged with the delicate task of balancing support for new types of capital formation with insuring appropriate protections are in place for “Main Street“ investors. The combination of an enforcement action against a fairly typical token issuer who appears to have stepped over the line in terms of promoting the investment aspects of their token, combined with the relatively welcoming notes sounded by Chairman Clayton‘s statement, give market professionals plenty of helpful material to utilize when advising clients in this area.”
Joshua Klayman, legal lead at the Wall Street Blockchain Alliance, described the SEC action as a clear indication the regulators were paying interest to promotional activities of ICOs.
“The SEC’s new Cyber Unit appears to be vigorously investigating token sales in real time. Of particular note is that the SEC’s Order yesterday referenced sales activities that took place via social media, including YouTube videos and Facebook posts. This seems to signal that the SEC is going beyond merely reading white papers and terms and conditions to truly try to take a comprehensive approach with respect to the evaluation of token sales. The fact that the token sales was stopped in progress suggests that the SEC’s Cyber Unit may be focusing closely on market developments as they arise.”
Recently, some ICOs have simply posted they will no longer accept US investors in light of the shifting regulatory environment but many still believe they are offering “Utility” tokens even while the consensus appears to believe most all tokens are, in fact, securities and thus regulated.
Expect more SEC actions similar to the Munchee ICO halt in the coming weeks as the SEC Cyber Unit picks up speed.
Related: Here is the SEC Order that Halted Munchee ICO
Related: SEC Chairman Jay Clayton Issues Statement on Initial Coin Offerings & Cryptocurrencies
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