The SEC’s Shutdown of the Munchee ICO

by Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

Commission’s action shows the limited utility of the utility token-security token distinction.


  • Regulator finds that sellers of blockchain-based digital coins cannot dodge securities law by calling the coins “utility tokens.”
  • It is still possible to carry out an initial coin offering in compliance with the Securities Act by relying on the Act’s Rule 506(c) or Regulation A provisions.
  • There are important differences that will make one or the other of those provisions more suitable for a particular offering.

In a December 11, 2017 Administrative Proceeding, In the matter of Munchee Inc. (the Order), the U.S. Securities and Exchange Commission (SEC) shut down an ICO (initial coin offering). In doing so, it dealt a serious blow to a somewhat strained distinction relied on in many ICOs this year between “utility tokens” and “security tokens.” The Order underscores the need to develop approaches for ICOs that are compliant with the Securities Act of 1933 (the Securities Act) and highlights the risks of engaging in non-compliant ICOs.

The Munchee ICO Launch

Munchee Inc. (Munchee) is a California business that created an iPhone application to allow users to post photographs and reviews of restaurant meals. Munchee intended to sell blockchain-based digital tokens or coins (MUNs) in order to raise about $15 million to improve its application. The MUNs would be integrated into the application and used for a variety of transactions, including buying advertisements, writing reviews and selling food. After an initial marketing period, Munchee launched its ICO on October 31, 2017, but on the next day, the SEC staff called and, within hours, Munchee shut down the ICO.

A Typical ICO Path Ends in a Bad Place

As described in the Order, the steps Munchee took to launch its ICO were typical of many prior ICOs. First, on October 1, Munchee announced that it would be launching a public ICO of 500 million MUNs. Concurrently, it posted a “white paper,” which described the MUNs, the offering process, the use of proceeds, statements as to how the MUNs would increase in value and the trading market for the MUNs. Munchee then posted information about the ICO and the MUNs on its main webpage, a blog, Facebook, Twitter, BitcoinTalk and various message boards.

The distribution method was also typical. MUNs could be purchased through various websites in the U.S. and worldwide. The offering included a pre-sale in which early purchasers could buy MUNs at discounts to the offering price. Munchee planned to hold back 55 percent of the MUNS to support its business, including by paying rewards in its application with MUNs, paying its employees and advisors with MUNs and facilitating advertising transactions with MUNs. Munchee also described a two-year timeline to develop a smart contract on the Ethereum blockchain platform, which would automatically integrate “in-app” use of the MUNs and set up virtual wallets for end-users of the MUNs.

Finally, Munchee took typical steps to develop a liquid secondary market for the MUNs. The white paper stated that MUNs would be available for trading on at least one U.S.-based crypto-currency exchange within 30 days of the conclusion of the offering. It also stated that Munchee would buy or sell MUNs, as required, to ensure liquidity.

On November 1, after being contacted by the SEC staff, Munchee unilaterally terminated its ICO and the contracts of sale it had entered into with investors, and returned their funds. The SEC decided to pursue the matter. Applying the Howey test, the SEC found that the MUNs were securities and that Munchee had violated the Securities Act by selling MUNs to the public without complying with the registration requirements. In light of the prompt remedial action taken by Munchee, the SEC elected not to impose a civil penalty. Instead, it imposed a cease and desist order on any future violations of Sections 5(a) and (c) of the Securities Act by Munchee.

Wait, What? Weren’t They “Utility Tokens”?

According to the Order, Munchee’s white paper referred to the SEC’s earlier DAO Report and stated that Munchee had done a “Howey analysis.” The white paper stated that “as currently designed, the sale of MUN utility tokens does not pose a significant risk of implicating federal securities laws.” (Emphasis added). Munchee concluded that because the tokens would be used in the iPhone application that it was developing, they were “utility tokens” and not “securities.”

The SEC disagreed. The Order states, “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’” (citing Forman, 421 U.S. at 849). The SEC acknowledged that the tokens were intended to be used in the Munchee application and to buy goods or services in the future. However, it focused on how Munchee created an expectation in its ICO that the value of the MUNs would rise due to the efforts of the company in developing its application (and managing its “ecosystem”) and how investors could expect to realize a profit by selling MUNs through a liquid secondary market. These features, of course, align with the core elements of the Howey testnamely “the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”

The Myth of the Magic Frog

The Order strikes at the heart of the distinction—of which much has been madebetween a “utility token” and a “security token.” Some ICO sponsors, like Munchee, have taken the view that a token is a utility token from inception and therefore outside of the scope of the Securities Act. Others have taken a “magic frog” approach, believing that a token can begin life as a security token (i.e., a magic frog) but at the point that the application and ecosystem go “live,” the token will be transformed into a utility token (i.e., the magic frog becomes a prince) and any securities law restrictions will no longer apply. The Order clearly rejects both of these approaches. So long as investors have the opportunity to trade in the tokens with an expectation that the value of the token will increase due to the efforts of the issuer, there is a high likelihood that the token will be—and will remaina security (i.e., a plain old frog) in the eyes of the SEC.

Compliant Paths Forward

The concept of the “utility token” as a means of avoiding compliance with the Securities Act in ICO offerings has therefore been properly and decisively rejected by the SEC, but that does not mean that an ICO cannot be conducted without the full regulatory burden of a public offering registered under the Securities Act. Rule 506(c) of Regulation D and Regulation A+ under the Securities Act are particularly well-suited for ICOs. Both offer the ability to engage in broad public solicitation of investors, but there are important differences that will make one or the other more suitable for a particular offering.

The Advantages of Rule 506 and Regulation A+

Rule 506.

The most notable advantages to offerings under the SEC’s Rule 506 are that, in an offering limited to “accredited investors” (as defined in Regulation D), there are: no substantive review at either the Federal or state level; no required disclosure filings; no limit on the amount that can be raised; and, in an offering under Rule 506(c), no limit on public advertising or general solicitation.

Further, disappointed investors in a Rule 506 offering cannot sue, under the federal securities laws, for negligent misrepresentation (that is, lack of due care or due diligence). As a result of a 1995 Supreme Court decision, Gustafson v. Alloyd (513 U.S. 561 (1995)) which held that the liability provisions of Section 12(a)(2) of the Securities Act do not extend to a private sale, investors in Rule 506 offerings may assert federal claims only under section 10(b) of the Exchange Act and Rule 10b-5, which require that the investor prove actual intent to defraud, or reckless indifference to the truth of the representations made in the offering. The practical effect of Gustafson has been to make it much harder for lawsuits to be maintained by investors in Rule 506 offerings.

The most notable disadvantages of Rule 506 are (1) that offerings generally must be limited to “accredited investors,” and (2) that securities sold in a Rule 506 offering are “restricted,” which means that there are substantial barriers to the establishment of a trading market that could offer liquidity for the securities. These disadvantages are both addressed in offerings under Regulation A+, but at a substantial cost.

Regulation A+.

Regulation A was recently expanded to allow an issuer to offer and sell up to $50 million of securities over a 12-month period in a public offering, without registration under the Securities Act, leading the amended rule to be called “Regulation A+.”

The most notable advantages of Regulation A+ are (1) that the issuer can “test the waters” with potential investors for interest in an offering both before and after filing an offering statement with the SEC; (2) that the offering can be made by public advertising or general solicitation; (3) that the offering need not be limited to “accredited investors”; and (4) that the securities sold in a Regulation A+ offering will not be considered “restricted securities” under the Securities Act and will not be subject to transfer restrictions. The lack of transfer restrictions creates an opportunity for establishment of trading markets in Regulation A+ securities, offering liquidity to investors that is not available in Rule 506 offerings.

In contrast to the lack of substantive review in Rule 506 offerings, however, the offering documents in a Regulation A+ offering must be filed with, reviewed by and “qualified” by the SEC. In addition, issuers in a Regulation A+ offering may be required to provide ongoing public reporting to the SEC, which is not required of issuers in Rule 506 offerings. “Tier 1” offerings under Regulation A+ (those raising up to $20 million) also are subject to substantive review by the states. “Tier 2” offerings under Regulation A+ (those raising $20-50 million), however, are not subject to substantive review in the states. Overall, Rule 506 offers a clear advantage in its lack of substantive review of offering materials at either the Federal or state level, and in the lack of any requirement for ongoing public reporting. This lack of review or ongoing reporting should also mean that there is a significant cost advantage to proceeding under Rule 506.

In contrast to Rule 506, sellers of Regulation A+ securities also will have the risk of liability under Section 12(a)(2) of the Securities Act for offers or sales that include a materially misleading statement or omission. As noted above, this liability risk is not present in offerings made under Rule 506. As a consequence, Regulation D offerings will continue to have a significant advantage over Regulation A+ offerings in terms of risk of liability. See Can Regulation A+ Succeed Where Regulation A Failed?

            Rule 506 or Regulation A+?

Because Rule 506 and Regulation A+ both have advantages and disadvantages, there is no one answer that will be right for all offerings, but each offers a way to conduct an ICO offering in compliance with the Federal securities laws. The decision which one to use should be made only after careful consideration with securities counsel.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Winthrop Shaw Pittman LLP | Attorney Advertising

Written by:

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.