About a week after the SEC halted the PlexiCoin ICO for fraud, the SEC issued an order halting Munchee’s ICO for offering and selling unregistered securities (the “Munchee Order”).

Munchee sought to raise $15 million by selling MUN tokens (“MUN”) in order “improve its existing app and recruit users to eventually buy advertisements, write reviews, sell food and conduct other transactions using MUN.” Munchee advertised that MUN would increase in value from Munchee’s efforts, including by creating an ecosystem, running its business in a way that would increase the value of MUN, and ensuring secondary trading of its tokens. Applying the Howey Test and its progeny, including those cited in the DAO investigative report released earlier this year, the SEC concluded that MUN were “investment contracts” and thus, securities.

An investment contract is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Munchee solicited potential investors in the United States, who sent Bitcoin or Ether to Munchee in exchange for MUN. These investors reasonably expected profit as Munchee targeted the sale of MUN to buyers interested in digital assets, ICOs, and the potential profits to be made from such sales, indicating to buyers that it would create demand and thus increase the value of MUN by revising the Munchee app, creating the Munchee “ecosystem” and creating demand for MUN. Investors’ profits depended on the entrepreneurial or managerial efforts of Munchee, which promised investors that it would use the investment proceeds to build an “ecosystem,” revise its app, generate demand for its tokens including by taking tokens out of circulation—i.e., “burning” them—and facilitate secondary trading.

Simply labeling a token as a “utility token” does not relieve the issuer from abiding by securities laws if the token is a security. Citing Foreman, the SEC stated in the Munchee Order, “Determining whether a transaction involves a security does not turn on labelling [sic] – such as characterizing an ICO as involving a “utility token” – but instead requires an assessment of “the economic realities underlying a transaction.”

The Munchee Order along with SEC Chairman Jay Clayton’s recent statement regarding ICOs and the newly formed cyber unit may indicate further enforcement action from the SEC.