A California-based company selling digital tokens to investors to raise capital for its blockchain-based food review service halted its initial coin offering (ICO) and returned the proceeds to investors after the SEC determined the sale constituted an unregistered securities offering.

Munchee was seeking $15 million in capital to improve an existing iPhone app centered on restaurant meal reviews. Its strategy was to create an “ecosystem” for “foodies” 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 [of the ICO] 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,” the SEC said.

But in the course of the offering, which was announced on October 1, the company and other promoters emphasized that investors could expect that efforts by the company and others would lead to an increase in the tokens’ value. The company also emphasized it would take steps to create and support a secondary market for the tokens, the SEC said.

By doing so, according to an SEC consent order, Munchee created an expectation among potential investors “that their investment in tokens could generate a return on their investment.” The SEC determined that purchasers had a reasonable expectation that they would obtain a future profit from buying and holding the tokens, called “MUN,” whether or not they used the Munchee app.

As the SEC revealed in its investigation of DAO, an investor-directed venture capital fund, “a token can be [deemed] a security based on 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.”

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The SEC contacted Munchee a day after the token sale began on October 31. After hearing from the SEC, the company refunded investor proceeds before any tokens were delivered. The company consented to the SEC’s cease-and-desist order without admitting or denying the findings. Due to the company’s quick reaction, the SEC decided not to impose a penalty.

Said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division: “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.”

The SEC’s new cyber unit is focused on misconduct involving distributed ledger technology and initial coin offerings; the spread of false information through electronic and social media; brokerage account takeovers; hacking to obtain nonpublic information; and threats to trading platforms. The SEC also has a distributed ledger technology working group that focuses on various emerging applications of distributed ledger technology in the financial industry.

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