Including mobile app compliance in the new product development can be crucial. The following article is a review of the Munchee mobile app case that was shut down by the SEC.
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.
Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts.
SEC: Utility Token Vs. Security Token
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.
“Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security. Determining whether a transaction involves a security does not turn on labelling – such as characterizing an ICO as involving a utility token – but instead requires an assessment of the economic realities underlying a transaction,” the SEC wrote in the order.
SEC Cyber Unit
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 2017 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.
While it's not clear how much money was raised by Munchee, the SEC said that “about 40 investors” bought tokens through the sale. The agency also noted that it first contacted Munchee on the second day of the sale and that it “did not deliver any tokens to purchasers”.
Mobile App Regulatory Compliance Review
This disastrous situation reinforces the importance of incorporating regulatory compliance review into your new product launch plan. Harsh regulatory penalties mean it’s not always possible to recover from a product design hiccup.
“Mobile App Compliance: Munchee Mobile App Gets Cease-and-Desist Order” article includes guidelines for developing a utility token that’s in regulatory compliance with SEC guidelines.
Interested in a pre-launch regulatory compliance review for your new mobile app design? Reach out for a pre-launch mobile app compliance review of your new product today.
InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013. InnReg specializes on mitigating regulatory risk while helping clients launch and grow innovative fintech products and services.