SEC v. Munchee Inc.

Questioning the myths: utility tokens can still be securities

Following the DAO report issued on the 25th of July, 2017 (that we’ve covered previously) the SEC hits the news again with its Press release on the Munchee Inc report.

“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.” – states the report.

The company behind the new food review app from San Francisco is meant to tokenize the user activity on the platform. $15M is needed to build, advertise and launch the platform. Munchee goes ICO.

Within the short period of a couple of months, the Munchee Inc puts together a team with a stunning track record and generates an immense community support on social media from the traders roaring to achieve stellar high gains on the MUN tokens. The ICO is scheduled for the 31st of October, 2018; the SEC calls on the November 1st… Within the next couple of hours, the token sale is suspended and around $60,000 collected in Ether is returned to the initial batch of about 40 investors. Just like with the DAO – no enforcement follows.

With the Munchee example, the SEC sets the second important Milestone in the history of ICOs: the utility tokens could be securities, too.

Along with this conclusion, there are a number of important takeaways that must be addressed.  In this article, Crypto Lawyers Corporation would like to recap on them. The materials presented are not a legal advice and should be considered for educational purposes only.

Note: At this point, it is a must for any ICO team to consult with the professional attorney and get the detailed legal opinion prior to conducting a token sale. In order to contribute to the development of the Blockchain Technology and Crypro Community, the Crypto Lawyers Corporation provides free introductory consultations to the founders. Feel free to sign up now!

The SEC will only target the ‘bad actors’

With the Munchee report, SEC is busting 2 myths, floating in the air following the DAO report. First, SEC shows us that not only the ‘bad actors’ involved in the ICO securities frauds are on the radar of the Commission. Second, it makes it clear that a token can still be regulated as a security even if it has a utility. As Stephanie Avakian, co-director of the SEC’s Enforcement division states:

 “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,”


“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.”


An in-depth legal argument from the professional attorneys

Despite claiming in their White Paper that the legal counsel has consulted them that MUN passes the Howey Test, no in-depth legal argument to back up the statement was provided. Making the community question whether the actual audit took place. Nevertheless, this fact did not influence the decision of the commission as it built its argument primarily on the fact that investors were reasonably expecting profits from the actions of the promoter.

The profit expectations

An important lesson to learn for all of the ICO promoters on the market is that SEC analyzes not only the White Paper and Website of the company but also the Marketing activities of the Companies and the behavior of their supporters while conducting the investigation. Munchee Inc has given enough public statements on their blog, their Facebook page and in the podcast to touted the opportunity for future profits of the MUN tokens. Here is a quote from the report, fact 17 says:

“For example, on or about October 25, 2017, Munchee created a public posting on Facebook, linked to a third-party YouTube video, and wrote “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!” The linked video featured a person who said “Today we are going to talk about Munchee. Munchee is a crazy ICO. If you don’t know what an ICO is, it is called an initial coin offering. Pretty much, if you get into it early enough, you’ll probably most likely get a return on it.” This person went on to use his “ICO investing sheet” to compare the MUN token offering to what he called the “Top 15 ICOs of all time” and “speculate[d]” that a $1,000 investment could create a $94,000 return.”

What’s Next?

At this point, it becomes more obvious that SEC, in its mission to protect the investors from a highly speculative and volatile market of cryptocurrencies and ICOs, is taking the approach of building a portfolio of precedents and reports that might be used both for lawmaking prosecution purposes. The fact that the commission hasn’t been involved in any enforcement process shows us that it might be waiting for a larger whale to deal with rather than waste the energies with relatively smaller projects like (hacked) DAO or (very cooperative) Munchee.

2018 is the year when we should be expecting a lot of new regulations on the ICO market. Following the Singaporean example, US is on the list of top countries that will most likely be regulating their crypto markets.


Starting your ICO? Consult first!

We live in the world of changes where the advanced security protocols are aiming to change the very structure of the Internet we’ve come to know up until today. The innovations in the blockchain and the services and infrastructures that are being built on top of it are changing the landscape of the Web.

If you’re looking to launch your ICO consulting with the legal professional is a must! At Crypto Lawyers Corporation we provide a free consultation for the founders. Feel free to reach out now with questions or concerns. Additionally, if you’re seeking for the pre-sale investors one of the core features of the Crypto Lawyers Corporation is our extensive IR network, modern and trustworthy legal and escrow services. Learn more about why every ICO needs an escrow here.

Learn more: How to choose the right country for your ICO?


About Crypto Lawyers Corporation

This blog was created in order to educate the Crypto Lawyers Corporation clients and partners about the developing world of ICO campaigns, be an introduction to the world of Blockchain, the latest industry updates and share our professional experience. However, none of the materials in this blog should be regarded as legal or investment advice.