Company Halts “Initial Coin Offering” After SEC Issues Cease-and-Desist Order; SEC Chairman Issues Statement on Blockchain-Based Offerings: Without Alleging Fraud, SEC Order Finds That Company’s Token Sale Was an Unregistered Public Securities Offering; SEC Chairman Jay Clayton Cautions on Initial Coin Offerings and Cryptocurrencies, While Noting Possibility of Valid Private Placements and Non-Security TokensSullivan & Cromwell LLP - December 13, 2017
On December 11, 2017, the SEC issued an order against Munchee Inc. finding that the California-based company’s marketing of digital “utility tokens” to raise capital for its blockchain-based food review service constituted unlawfully unregistered offers and sales of securities. The SEC found that: (1) Munchee was planning to take steps to increase the value of the tokens; and (2) purchasers of the tokens had a reasonable expectation of obtaining future profits from the efforts of Munchee and its agents. Accordingly, the SEC found that the tokens were securities, and the offering and sale of the tokens was subject to the Securities Act of 1933.
On the same day, SEC Chairman Jay Clayton released a public statement addressing cryptocurrencies and initial coin offerings. The statement cautioned both market professionals and investors and reiterated the SEC’s focus on the application of U.S. federal securities laws to blockchain-based offerings and products, including secondary trading. The statement also noted the possibilities of legally compliant private placements of tokens, tokens that are not securities and other avenues by which blockchain based investment and trading might be conducted lawfully, suggesting a goal of regulating rather than eliminating these growing digital markets.