The Securities and Exchange Commission (SEC) on Monday said it had shut down an initial coin offering (ICO) for a San Francisco-based food review service after deeming the company was selling unregistered securities.
{mosads}The operation was being conducted by Munchee, which was looking to raise $15 million in capital from selling such digital tokens. According to the SEC, Munchee wasn’t selling tokens but rather unregistered securities in its ICO and must now return the money to investors.
The SEC generally allows ICOs, a tool that cryptocurrency-based startups use to raise money for their projects. But the agency recently released guidance saying that it would take action against ICOs that function more like shares of a company.
SEC permitted ICOs that let investors buy digital tokens that played an integral part in the function of a business. Filecoin, for example, launched its ICO in August, selling tokens that can be exchanged for extra computer and server space.
Munchee’s sale bears some similarity to other ICOs. Their coin offering included a white paper explaining how their tokens functioned. Its tokens, however, wouldn’t be functional until at least 2018 and the SEC deemed their value was contingent on the “managerial and entrepreneurial efforts of others.”
The SEC noted that “Even if [Munchee’s] tokens had a practical use at the time of the offering, it would not preclude the token from being a security,” because of how the tokens were released and pitched to consumers.
Marco Santori, policy counsel to Blockchain.com, argued in a Twitter thread that the decision will likely lead to fewer ICOs in which the coin being offered is not yet functional.
The SEC’s action against Munchee is a part of its growing body of moves to regulate ICOs that it sees as violating the law.
The agency set guidelines in July that the tokens in the high-profile sale from virtual organization The DAO were actually securities and violated SEC laws. It’s also taken action against several digital coin scams.