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SEC Shuts Down Initial Coin Offering Using Blockchain for Failure to File Securities Registration Statement

On December 11, 2017, the SEC instituted cease-and-desist proceedings against Munchee Inc., the creator of an iPhone application that allows users to review restaurant meals, with regard to Munchee's planned initial coin offering (ICO) using blockchain or a distributed ledger. Munchee conducted the ICO to raise $15 million in capital by selling digital tokens that it created so it could improve the app and recruit users. The tokens were purchased by using either Bitcoin or Ether. The SEC proceedings contend that, in connection with the ICO, Munchee represented that its digital tokens would increase in value based on its efforts and that they would be traded on secondary markets.

The SEC, citing the 1946 Supreme Court decision in SEC v. Howey, 421 U.S. 837 (1946), took the position that the tokens were securities as defined by section 2(a)(1) of the Securities Act of 1933 as they are “investment contracts,” in large part, because the purchasers of the tokens had expectations of making a profit. Thus, the SEC took the position that Munchee should have filed a registration statement or otherwise qualified for an exemption from registration. More ›