SEC Charges Firm Selling Digital Coins With Sale of Unregistered Securities
The creation of a unique digital coin or token such as Bitcoin, Ether or fiat currency tied to blockchain or cryptographically-secured ledger has become a controversial but expanding form of payment in some circles. Some believe the coins are the future; others think they are nonsense. In some instances promoters have conducted initial coin offerings or an ICO of tokens or a unique digital coin as a form of financing. The Commission previously issued a report stating that under certain circumstances the coin or token could be viewed as a security, a form of investment contract. Other regulators around the world are studying the technology.
Now the Commission has filed an action alleging that a token issuer conducted an illegal distribution of securities because the tokens are in fact investment contracts within the meaning of the federal securities laws. In the Matter of Munchee Inc., Adm. Proc. File No. 3-18304 (Dec. 11, 2017).
Munchee is a privately held firm based in San Francisco. In late 2015 it began developing an iPhone app that was launched two years later. The app allowed users to post photographs and reviews of restaurant meals on line.
The firm created a plan to improve the app. Part of the plan called for raising capital through the sale of tokens or MUN on the Ethereum blockchain. Munchee created 500 million MUN tokens. The plan was to raise about $15 million in Ether by selling 225 million MUN tokens out of the 500 million MUN tokens created by the company.
Munchee marketed the coins through a website, a white paper and other means. The white paper claimed the MUN were not securities. Key to the plan was the creation of an ecosystem which would, along with other steps, increase the value of the coins. The system would begin with payment in MUN to those who wrote food reviews and the sale of advertising to restaurants along with the “in-app” purchase by app users of MUN tokens. The firm also planned to work with the restaurant owners so that food could be purchased with the tokens. Over time, and as each element of the ecosystem expanded, the value of the MUN would increase, according to the plan.
A key part of the plan was the trading of MUN on an exchange. Munche represented that MUN tokens would be available for trading on at least one U.S. based exchange within thirty days of the close of the initial coin offering.
Munchee offered the coins to the public beginning on October 17, 2017. Potential investors were told that they had a reasonable expectation of making future profits by investing in the MUN tokens based on the potential development of the ecosystem and the future exchange listing of the coins. As the ecosystem expanded the value of the coins would increase, according to the firm. In making these representations Munchee highlighted the credentials and skills of its agents and employees. In marketing the coins, the firm focused on forums for people interested in investing in Bitcoin and other digital assets, and sites such as BitcoinTalk.org, a message board for discussing investments in such assets. The firm stopped selling the coins on November 1, 2017 after being contacted by the staff.
Under Section 2(a)(1) of the Securities Act the MUN tokens are securities, according to the Order because they are investment contracts. Accordingly, in offering the tokens for sale in the absence of an effective registration statement, or an exemption from registration, Munchee violated Section 5(a) of the Securities Act. The case will be set for hearing.