Updated | December 11, 2017, 11:27PST: Although Munchee's token offering page has been taken down, their website is still online.
On the morning of December 11, 2017, the US Securities and Exchange Commission filed an agreed upon cease-and-desist order against Munchee, Inc, a company headquartered in San Francisco that created a restaurant review app that is only available to users in the United States. The order provided that Munchee had engaged in the illegal unregistered offering and sale of securities.
In October, the company began accepting funds from investors in exchange for Ethereum-based MUN tokens, which were to be issued in the future, through a token offering (ICO). Munchee's goal was to raise approximately $15 million through the sale of 225 million MUN tokens.
"On November 1, 2017, Munchee stopped selling MUN tokens hours after being contacted by Commission staff," wrote the SEC. "Munchee had not delivered any tokens to purchasers, and the company promptly returned to purchasers the proceeds that it had received."
On November 2, 2017, Munchee announced via Twitter that it had chosen to end its ICO to abide by legal requirements and it returned all of the funds it had received from investors.
How did Munchee violate the securities laws?
The SEC determined that MUN tokens were securities pursuant to Section 2(a)(1) of the Securities Act and also found that "MUN tokens are 'investment contracts' under SEC v. W. J. Howey Co., 328 U.S. 293 (1946) and its progeny."
The Commission explained, "In connection with the offering, Munchee described the way in which MUN tokens would increase in value as a result of Munchee's efforts and stated that MUN tokens would be traded on secondary markets."
Moreover, the cease-and-desist order indicates that the SEC was not swayed by Munchee's self-serving statements that it believed it was complying with the securities law. The agency notes that the MUN whitepaper referenced the SEC's DAO Report, and the document states that after conducting a "Howey analysis," the Munchee team determined that "as currently designed, the sale of MUN utility tokens does not pose a significant risk of implicating federal securities laws." However, the SEC then highlights that the MUN whitepaper "did not set forth any such analysis."
While the SEC expressly concluded that Munchee had offered and sold tokens in violation of the securities laws, it opted not to impose a civil penalty based on remedial acts promptly undertaken by Munchee and because Munchee had cooperated with staff at the SEC. Although the SEC did not impose a civil penalty, the fact that it contacted Munchee so soon after the commencement of the token offering appears to reflect that the SEC is ramping up its token offering enforcement efforts.
At the time of publication, it appears that the Munchee website is no longer online.