In the fast moving market for initial currency offerings in the form of digital cryptocurrencies, the SEC is acting faster than ever in an effort to maintain some order in this new wild west – gold rush spawned by this latest and greatest digital technological advancement known as block chain technology.
We published an article last week relating to the newSecurities & Exchange Commission (SEC) Cyber Unit taking action against one ICO issuer. This week, the SEC announced that it contacted a California-based company named Munchee Inc. in relation to Munchee’s selling of digital tokens to investors to raise capital for its blockchain-based food review service because of concerns that the company was acting unlawfully in violation of securities registration rules and regulations. According to the SEC, the company responded by halting its initial coin offering (ICO) and agreed to an order in which the SEC found that its conduct constituted unregistered securities offers and sales.
According to the SEC’s order, before any tokens were delivered to investors, Munchee refunded investor proceeds after the SEC intervened. Munchee was seeking $15 million in capital to improve an existing iPhone app centered on restaurant meal reviews and create an “ecosystem” in which Munchee and others would buy and sell goods and services using the tokens. The company communicated through its website, 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.
According to the order, 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. The company also emphasized it would take steps to create and support a secondary market for the tokens. 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. A token will be considered to be a security if the structure of the deal satisfies the long-standing facts and circumstances test that includes assessing whether investors’ profits are to be derived from the managerial and entrepreneurial efforts of others. In this regard, tokens are no different than any other form of investment — if investors give money to managers of a business operation, and expect a return on investment generated by the work of others, then it is likely the token will be considered a security, and there are other factors that must be considered as well.
The SEC stated: “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.”
Wittenberg Law has extensive experience in the securities field. Whether you seeking to issue tokens through an ICO or making an investment in an ICO, give us a call at (310) 295-2010 to learn how we can help.