Quickly following the SEC’s statement regarding ICOs (Initial Coin Offerings) and cryptocurrencies, the regulator shut down Munchee’s token sale, which raised $15 million. The company received their cease and desist from the SEC on December 11, with all $15 million being returned to their respective investors.
Munchee looks to roll out a decentralized blockchain-based food review and social platform, and while the website is operational, even already having an app downloadable for iOS devices on the App Store, any information regarding the token sale is no longer accesssible from their website ‘token.muchee.io.’
While Munchee classified the MUN as a “utility” token, meaning it would be used primarily within their ecosystem and not used to fund operations, a Howey Test, a Supreme Court finding that classifies anything with an expectation of return to be an investment vehicle, led the SEC to discover Munchee was auctioning a security. SEC Chairman Jay Clayton says in his public statement regarding cryptocurrencies and Initial Coin Offerings:
“Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.”
To this date, no ICOs have been approved by the SEC. Furthermore, the SEC has not given permission for the listing or trading of any exchange-traded products that hold cryptocurrencies, or any other assets linked to crypto.
ICOs have quickly become the de facto standard when it comes to raising funds for a new innovating project in the cryptocurrency sphere. And while Clayton does not deny the effectiveness of entrepreneurs raising funds through this method, any offering of securities needs to come with the right disclaimers, he writes;
“I believe that initial coin offerings, whether they represent offerings of securities or not, can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.”
Moving forward, it will be even harder to US-based participants to contribute to any new ICO’s, or Token Generation Events, as some projects are now calling their crowd sales. Participants outside of the United States are unaffected, as the SEC only operates within the USA’s jurisdiction, but the SEC’s actions here may set a precedence that countries around the world may follow.
Tone Vays, a notable critic of ICOs, said on Jimmy Song’s Off Chain that he expects the SEC to continue to go after the “low hanging fruit,” namely ICOs showing clear signs of misconduct such as Munchee. He also asserted that the regulatory agencies are looking to catch the bigger operations out eventually, like Ethereum.
In October, the regulatory authorities took down another ICO claiming to offer the “First Ever Cryptocurrency Backed by Real Estate.” The SEC charged Maksim Zaslavskiy of REcoin with violations of the antifraud and registration provisions of the federal securities laws as well as a complete barring from participation in any future participation in ICOs.
As more institutional investors are looking to enter into bitcoin and the cryptocurrency sphere, the SEC must provide the same amount of investor protection they are accustomed to in other markets. While the SEC did not ban ICO’s, the legal red tape projects must now get through to penetrate the US market will leave many US-based participants sitting out on many innovative projects.