## Facts

- Munchee Inc., a California company, operated an iPhone restaurant-review app and sought financing to improve the app and build a token-based ecosystem.
- Munchee launched an initial coin offering (ICO) for “MUN” blockchain tokens, aiming to raise about $15 million to fund development and user adoption.
- Munchee planned to sell hundreds of millions of tokens, retain a substantial token reserve, and use proceeds to build and market the ecosystem.
- At the time of the ICO, the MUN token was not usable to buy goods or services on Munchee’s platform; key functionality depended on future development.
- Munchee marketed the ICO through a white paper and online channels, emphasizing token appreciation tied to Munchee’s roadmap and efforts, and highlighting anticipated secondary-market trading.
- Marketing targeted crypto-asset investors and included incentive programs that amplified promotional activity on social media.
- Munchee did not file a registration statement for the token offering and did not establish an available exemption.
- After the SEC staff contacted Munchee shortly after the public sale began, Munchee stopped the offering, returned investor funds, and did not deliver tokens.

## Issues

1. Whether MUN tokens were “securities” as “investment contracts” under the *Howey* test.
2. If MUN tokens were securities, whether Munchee violated Securities Act §§ 5(a) and 5(c) by offering and selling without an effective registration statement or exemption.

## Decision

- The SEC instituted an administrative cease-and-desist proceeding and issued an order on consent.
- The SEC found MUN tokens were securities because they were investment contracts under *Howey*.
- The SEC found Munchee violated Securities Act §§ 5(a) and 5(c) by offering and selling the tokens without registration or an exemption.
- The SEC ordered Munchee to cease and desist from future violations of §§ 5(a) and 5(c).
- In light of prompt cessation, repayment, and cooperation, the SEC did not impose a civil penalty.

## Legal Principles

- A digital token may be an “investment contract” (and therefore a security) if purchasers invest value in a common enterprise with a reasonable expectation of profits derived from the managerial or entrepreneurial efforts of others.
- Economic reality controls over labels; calling a token a “utility token” does not preclude securities treatment when marketing and circumstances create profit expectations.
- Marketing that stresses price appreciation, issuer-driven development, and secondary-market trading supports an inference that purchasers reasonably expect profits.
- Pre-functional or non-usable tokens sold to fund platform development tend to satisfy reliance-on-others because purchasers depend on the issuer to create token utility and market value.
- Offers and sales of securities in interstate commerce must be registered or exempt; otherwise, they violate Securities Act §§ 5(a) and 5(c), and cease-and-desist relief is available under Securities Act § 8A.

## Conclusion

The SEC concluded that Munchee’s ICO involved an unregistered offer and sale of securities because purchasers were led to expect profits from Munchee’s future efforts to build and market a token ecosystem, warranting a cease-and-desist order under Securities Act § 5.


In re Munchee Inc., 2017 WL 10605969 (SEC 2017)