Munchee is a California-based company that created an app (the “Munchee App” or “App”), which allowed individuals to post photographs and reviews of restaurant meals. The company began developing the App in late 2015, and launched the App in mid-2017 in the United States, the only country where it is currently available. By fall 2017, Munchee desired to improve its App by offering additional features, planning to execute its business plan and raise capital through the creation of a digital token, MUN, which would be incorporated into the App. Munchee envisioned an expanded “ecosystem” where users would create new reviews in exchange for MUN or use MUN to buy meals and attain higher status within the Munchee App, with participating restaurants likewise obtaining MUN to reward diners and pay Munchee for advertising. The company set milestones for the Munchee App expansion through 2018 and 2019. Development and marketing of Munchee App and MUN was exclusively limited to the efforts of Munchee’s employees and agents, and the token was not designed to be functional for users on the App by the close of the ICO.
Munchee targeted its ICO marketing to the crypto community generally—i.e., people with an interest in tokens or other digital assets that have in recent years created profits for early investors in ICOs—rather than diners, restaurants, or other potential users of the platform. Munchee advertised that the company would continue developing and marketing the App, and that this would help increase MUN’s value. Munchee also touted the “burning” of tokens upon use on the App as a way to take tokens out of circulation and increase MUN’s potential profitability. The company further represented in its marketing materials that MUN could be traded on secondary exchanges within 30 days of the ICO’s closing. Its marketing was widespread and international in scope, utilizing social media and other platforms and featuring offering materials in different languages.
In October and November of 2017, Munchee offered and sold its digital token with the hope of raising approximately $15 million. On the second day of sales of MUN tokens, the company was contacted by the SEC. Munchee determined within hours to shut down its offering. As a result, it did not deliver any tokens to purchasers, and returned to purchasers the proceeds that it had received.
As explained in the Munchee Order, the SEC determined that MUN tokens were securities under federal securities laws, and that its token sale amounted to an offering and selling of securities without filing a registration statement with the SEC or qualifying for a registration exemption. In examining the economic realities of Munchee’s token sale, significant to the SEC’s findings that the MUN tokens constituted securities were the following key facts:
Though the SEC determined that Munchee violated federal securities laws, the SEC decided not to impose a civil penalty, noting Munchee’s prompt remedial measures and cooperation with the SEC.
Based upon the SEC’s guidance in the Munchee Order and Chairman Clayton’s subsequent public statement, we offer the following practical considerations for any company considering engaging in a token sale, in order to mitigate the risk of liability under federal securities laws:
Over the past several months, scores of clients from around the world have relied on Goodwin to execute their initial coin offerings, drawing from our expertise in regulatory compliance and enforcement, tax, and blockchain and emerging technology startups. Our experienced attorneys can guide you through the full lifecycle process of a token sale with a core team that includes experienced former U.S. federal prosecutors, corporate securities lawyers, specialists in ﬁnancial transaction regulations and OFAC issues, and former in-house counsel for a regulated options exchange. Goodwin’s technical expertise, geographic footprint in key industry markets, and depth of experience allows us to offer unprecedented service to help our clients capitalize on opportunities and meet the challenges of this evolving industry.
 Munchee Inc., Securities Act of 1933 Release No. 10445 (“Munchee Order”) (December 11, 2017), https://www.sec.gov/litigation/admin/2017/33-10445.pdf (order instituting cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933, making findings, and imposing a case-and-desist order).
 SEC Chairman Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings, U.S. Securities and Exchange Commission (Dec. 11, 2017), https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.