Jan 18, 2018


Business Formation, Equity Crowdfunding, Going Public By Lahdan Rahmati

On October 31, 2017, Munchee Inc. (Munchee) launched an Initial Coin Offering (ICO) to raise $15 million to improve its blockchain-based iPhone app, an app to post pictures of and review restaurant meals. The next day, the U.S. Securities and Exchange Commission (SEC) contacted Munchee – not because they were interested in the token sale – but to shut down the ICO.  Within hours, Munchee wisely stopped selling its digital tokens (MUN tokens) and returned all $60,000 offering proceeds to investors.  On December 11, 2017, the SEC instituted cease-and-desist proceedings against Munchee (Order).

What were the SEC’s reasons for shutting down the ICO?

The following breaks down why, according to the SEC, MUN tokens satisfied the four elements of an “investment contract” under SEC v. W.J. Howey Co. (Howey Analysis):

  1. Investment of money: Investors could contribute dollars, ether or bitcoin.
  2. In a common enterprise: It was a common venture.
  3. With a reasonable expectation of profits: Investors expected to profit from the appreciation of value of MUN tokens, whether or not they ever used the Munchee App or participated in the MUN “ecosystem” (see diagram below), based on Munchee’s representations. Munchee described the “ecosystem” that it would create, stating that it would pay users in MUN tokens for writing food reviews and would sell both advertising to restaurants and “in-app” purchases to app users in exchange for MUN tokens.
  4. To be derived from the entrepreneurial or managerial efforts of others: Munchee and its agents were in control of revising the Munchee App, investors had little choice but to rely on Munchee’s efforts, and no other person could make changes to the Munchee App.  Increased participation in the “ecosystem” would purportedly lead to increased value of MUN tokens.

The MUN White Paper referenced the DAO Report and stated that a Howey Analysis was performed, but, according to the SEC’s analysis, incorrectly concluded that MUN tokens were utility tokens.  The Order explains that even if MUN tokens had a practical use at the time of the offering, it would not preclude the tokens from being securities. As stated in the Order, determining whether a transaction involves a utility or security does not turn on labelling but instead requires an assessment of the economic realities underlying a transaction.”

What are some Best Practices to help you launch an SEC compliant ICO?

Perform legal analysis to determine whether your token is a utility token or a security token!   

In the pre-sale phase, it is critical to have counsel correctly perform legal analysis to determine whether your token is a utility token or a security token. The Order points out that the Howey Analysis is missing from the MUN White Paper, implying that it may be best practice for issuers to disclose legal analysis in their white papers.

File a registration statement or Qualify for an exemption from registration!

Offers and sales of securities must be registered, exempt from registration, or they are in violation of the federal securities laws. Munchee offered MUN tokens to the general public without filing a registration statement or qualifying for an exemption and the tokens were deemed to be securities by the SEC. Some exemptions that provide an alternative to filing a registration statement include Regulation CF, Regulation A or Regulation D.

Do not guarantee that tokens will be traded on secondary markets! 

The MUN White Paper ensured that MUN tokens would be available on a number of exchanges in varying jurisdictions and the tokens would be available for trading on at least one U.S. based exchange within 30 days of the conclusion of the offering.  This was another factor that led the SEC to conclude that MUN tokens were securities because investors expected MUN tokens to trade on a secondary market and increase in value.

Do not promise A SPECIFIC return on investment!

Munchee promised “199% GAINS on MUN token at ICO price!” This was another factor that led the SEC to conclude that MUN tokens were securities because investors expected MUN tokens to increase in value.

If you are interested in launching an ICO, please contact us at or by phone at 202-869-0888 (ext. 100).  We have a group of attorneys that are focused on legal and regulatory compliance in the area of cryptocurrency and ICOs.

BEVILACQUA PLLC is a boutique corporate and securities transactional law firm that understands entrepreneurs and provides goal oriented legal services that facilitate agreement and closure.  Our partners have been handling complex domestic and international transactional matters for over two decades and have the business experience to give context to the legal services that we provide. Learn more about our firm at