Earlier today I received a link from a friend regarding the SEC shutting down the Munchee ICO, and I decided to dig deeper. Don't let the legalese in the first page put you off; this document is really pretty accessible for the average person contemplating an ICO.
First, here's the actual plain English regarding why the sale of MUN tokens was terminated:
Among other characteristics of an “investment contract,” a purchaser of MUN tokens would have had a reasonable expectation of obtaining a future profit based upon Munchee’s efforts, including Munchee revising its app and creating the MUN “ecosystem” using the proceeds from the sale of MUN tokens. Munchee violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying for exemption from registration with the Commission. On the second day of sales of MUN tokens, the company was contacted by Commission staff. The company determined within hours to shut down its offering, did not deliver any tokens to purchasers, and returned to purchasers the proceeds that it had received.
If you read When Is An ICO Token A Security?, you'd know there are some fairly simple rules:
- If you sell it in the U.S. And it qualifies as a security, it's regulated by the SEC, even if part of your operation is offshore.
- Both tokens and SAFTs, Simple Agreement for Future Tokens, are regulated securities.
- Only cryptocurrencies with existing liquidity and use cases avoid the SEC's attention, and then they face other regulatory issues.
So where did Munchee go wrong? Here are some specific examples from the SEC document:
**Fact #8 **
“The MUN White Paper referenced the DAO Report and stated that Munchee had done a “Howey analysis” and that “as currently designed, the sale of MUN utility tokens does not pose a significant risk of implicating federal securities laws.” The MUN White Paper, however, did not set forth any such analysis.”
The Munchee ICO was asking for Bitcoin or Ether, and offering MUN tokens in exchange, describing the steps they would take to cause those token to appreciate in value. This is a clear cut violation of the simple definition of a security in a Howey analysis: “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
While Munchee told potential purchasers that they would be able to use MUN tokens to buy goods or services in the future after Munchee created an “ecosystem,” no one was able to buy any good or service with MUN throughout the relevant period.
“While Munchee told potential purchasers that they would be able to use MUN tokens to buy goods or services in the future after Munchee created an “ecosystem,” no one was able to buy any good or service with MUN throughout the relevant period.”
The MUN token environment was not “fully developed”. If it had been possible to replicate that first famous Bitcoin transaction, the May 18th, 2010 pizza purchase, that would have been a sign that MUN was functioning in the manner in which the creators envisioned. Since that wasn't the case, SEC rules still applied.
The full document is only ten pages and it's very accessible for the layman. If you're looking for a guide on how to avoid getting shut down by the SEC, this is a pretty complete example of what not to do when attempting an ICO.
Note that this is NOT an indictment of what they were trying to do - there is absolutely room for innovation involving an Ethereum token, restaurant reviews, and patron rewards. We may see Munchee come back to make a successful ICO, but they either need securities law advice, or some seed funding to make it to that "fully developed" status needed to avoid unwanted SEC attention.