WASHINGTON—The Securities and Exchange Commission intervened to halt a San Francisco company’s $15 million initial coin offering, another sign that regulators are continuing a crackdown on the new fundraising method.
The SEC said Monday that Munchee Inc.’s digital token sale was illegal because it was advertised to the public without providing investor disclosures that are required under the law. The case is the first in which the SEC has taken action against an ICO without making fraud claims.
Munchee Inc. sought to raise $15 million by selling tokens that it said could be traded and would rise in value as the firm expanded its business, claims that put the offering under the SEC’s jurisdiction. It offered the coin, which it called MUN, in exchange for bitcoin or Ethereum, the two best-known cryptocurrencies, the SEC said.
The company didn’t immediately respond to an email seeking comment.
Munchee operates an iPhone app for reviewing restaurants that it has described as a combination of Yelp and Instagram. It raised about $60,000 from 40 investors before the SEC contacted the company. The firm halted the offer hours after hearing from the regulator and didn’t pay a penalty to end the investigation, the SEC said in an order announcing the settlement.
“The commission recognized that the company stopped the ICO quickly, immediately returned the proceeds before issuing tokens, and cooperated with the investigation,” said Stephanie Avakian, the SEC’s enforcement co-director.
Initial coin offerings are similar to crowdfunding and usually offer buyers of digital tokens the right to use them at some future date to buy a product or service the company will develop. That’s what investors in Munchee’s ICO were told, the SEC said. The company also said the tokens would be used to pay people who used its app to review restaurants, the SEC said.
The SEC has telegraphed its intent to closely monitor ICOs. In July, it issued an investigative report in which it argued ICOs could meet the definition of a security and urged companies to make sure they had solid reasons to believe their deal was exempt from oversight.
Munchee issued a white paper in October that said its deal didn’t qualify as a security—but the firm didn’t back up the claim with any legal analysis, the SEC’s order said.
Companies can largely avoid SEC oversight if they limit the sale of their securities to wealthy investors and institutions. Otherwise, they have to register the sale with the SEC and provide investors with extensive disclosures that describe the business, its financial condition, and any risks or headwinds it is likely to face.
The SEC’s previous enforcement actions against ICOs involved allegations of fraud. In one case, the SEC said the salesman peddled tokens that didn’t exist. In another, the regulator alleged the promoter falsely promised a 13-fold profit in less than a month.
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