Munchee, a foodie mobile app based in San Francisco, used a creative approach to attract investors in the crowded restaurant rewards category. They differentiated their program by describing the “rewards token” as a cryptocurrency, and issuing an initial coin offering (ICO) for the Munchee MUN.
The scheme worked beautifully in the short-term, generating $15 million in funding from cryptocurrency investors. However, the company was put out-of-business within months when the Securities and Exchange Commission (SEC) hit them with a cease-and-desist order. They were forced to return investor funds, and the company appears to be closed down. The website has disappeared from the Internet, and the Twitter account has been dormant since November.
The developers believed they had designed a utility token, not a security token, as defined by the Howey Test for investment contracts. They were careful to include disclosure information with phrases like, “…does not constitute the offering of a security.” However, the SEC disagreed with their position calling the sale of MUN tokens an unauthorized securities transaction.
Click to SEC Eats Away at Munchee Utility Tokens: Guidance for ICOs to learn more about the SEC opinion. This article includes guidelines for developing a utility token that’s in regulatory compliance with SEC guidelines.
Munchee isn’t the first casualty of the new Cyber Unit at the SEC, whose mission is to target cyber-related misconduct. The unit was formed in September, and filed its first charges in December against PlexCorps and Munchee. Both companies were forced to return investor funds and refund any coin sales in order to avoid civil penalties and frozen assets.
This disastrous situation reinforces the importance of incorporating regulatory compliance into your new product launch plan. Harsh regulatory penalties mean it’s not always possible to recover from a product design hiccup.
Please don’t hesitate to reach out for a pre-launch regulatory compliance review for your new mobile app design.