cryptocurrency, bitcoin, ethereum, crypto
The Securities and Exchange Commission’s (SEC) Cyber Unit recently sent a cease and desist letter and released an Order related to an ICO that required the issuer, Munchee Inc, to refund investors for their token investments. Munchee was intended to be a “Yelp Meets Instagram” that offered tokens in relation to restaurant reviews.
The cease and desist letter from the SEC gives us more guidance on how the SEC is thinking about ICOs.
The Howey test is a four-part test used to determine if an investment is a security. The Munchee order gives insight about six features of an ICO that can tip the scales on the Howey factors.
Specifically, the six features discussed in the order are:
So what can the order tell us about these?
Normally, if a token is immediately usable, it is less likely to be considered a security. The Munchee Order, however, implies that this isn’t determinative; the SEC may still consider it a security even if it is immediately usable.
The Order notes that if purchasers have a reasonable belief they could profit by hodling or trading, that may be sufficient to find it is a security.
Efforts of Others
If the ICO issuer promises future improvements on the platform or tokens, it's more likely likely the ICO will be considered a securities offering.
Munchee’s white paper promised that the tokens would be tradable within 30 days of the ICO, prior to its system actually being up and running for viable commercial use. This suggests it is a security, as Munchee seemed to prioritize "tradability" over "usability."
Manner of Advertising
Munchee advertised its offering to the general public, specifically comparing it to prior ICOs that created profits for investors. The Order implies that if an offering is advertised outside of its target commercial community, the ICO is a security. Because Munchee offered the tokens outside of its target restaurant users, to the general public, it was more likely to be considered a security.
Use of Proceeds
Munchee told buyers the proceeds would be used to build an ecosystem and make the tokens more valuable. Munchee directly promoted that the proceeds would be used to appreciate the value of the investment. The order suggests that, where proceeds are marketed as supporting the commercial purposes of the issuer like this, the ICO is likely a security offering.
Want to know more about how to analyze if a crypto is a security? You can see a break down of how the SEC analyzes investments here.