The SEC has issued a Cease-and-Desist Order in regards to the Initial Coin Offering (ICO) of the MUN token created by Munchee, Inc., a California corporation. During the investigation of the MUN token sale, the SEC found Munchee’s tokens to be securities and required the company to halt its ICO and issue refunds to the MUN token buyers. Because of the company’s cooperation during the investigation and its prompt compliance with the SEC order, there were no penalties imposed.
Munchee intended its MUN token to be used on its iPhone app created to review restaurant meals. At the time of the token sale, Munchee had an existing app, which it intended to improve with the raised funds. However, despite the utility nature of the token model and its useful application, Munchee was promising an increase of the MUN token value as well as its trading on the secondary market. On its social media accounts and a web-site, Munchee was making numerous statements implying that the token buyers could financially benefit in the future because the value of the MUN token was to go up as the company grew its business and ecosystem, for example “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!” The company heavily promoted its ICO to the cryptocurrency investors through various social media channels focusing on the financial value and investment opportunity offered by the MUN token. The SEC applied the Howey Test to the MUN offering and determined that it satisfied the test.
Under the Howey Test, a security is an investment contract with a reasonable expectation of profit from the efforts of others. The MUN token buyers were investing in the Munchee through its ICO and reasonably expected to profit from such investment in reliance on the relevant representations of the company. The increase of the MUN value was to be caused by the company’s efforts to improve its app, grow the ecosystem and support a secondary market trading. MUN token buyers had no influence on the company’s development of its business and ecosystem.
Therefore, the SEC determined that the representations about the MUN token and its future value made by Munchee led the token buyers to reasonably expect a profit from the purchase of the MUN token. And as such, the MUN ICO was found to be a sale of unregistered securities in violation of the U.S. law.
This case shows that even a token that has no direct profit built into its model can be found to be a security if it is sold as an investment or speculative instrument.