ICO Alert – The SEC Knows How to Use Social Media

On December 11, 2017, the US Securities and Exchange Commission (SEC) issued a cease and desist order to halt an initial coin offering being conducted by Munchee Inc., a blockchain-based food review app.  Munchee was conducting a token sale of its MUN token by which Munchee sought to raise $15 million.  As a result of the SEC’s action, Munchee voluntarily halted its token sale and returned all amounts received to those who had purchased MUN tokens.  

The Munchee action has major implications for the ICO market, particularly because it is the first time the SEC has brought a public action against a company that seemingly had a decent argument that its token was a “utility token” and therefore should have fallen outside the purview of the SEC.  There are several key takeaways that can be distilled from what was and was not said by the SEC in the Munchee action.  This post briefly covers one such takeaway, namely, that the SEC knows how to use social media.

With its action against Munchee, the SEC took its oversight to the next level by indicating to the ICO market that it is paying close attention to the various social media channels that token sellers are utilizing for communications with potential purchasers.  The SEC turned to Munchee’s website, Twitter account, Facebook page, and posts on various message boards such as BitcoinTalk in conducting its investigation into the Munchee ICO.  Moreover, the SEC even cited an endorsement that Munchee made on their Facebook page of a popular ICO YouTube channel that touted the Munchee ICO and the potential profits that could be made from participation in the sale.  And they also pointed to a crypto podcast in which one of the Munchee founders talked about making money buying Ether and other crypto assets.  

Munchee’s public statements, and its endorsement of other people’s public statements, played a big role in the SEC’s determination that the MUN tokens were securities.  For those conducting token sales, this means that serious thought needs to be put into every public statement made by the company and its personnel across all social media channels regarding the token sale.  For one, there should be absolutely no promises regarding, or allusions to, any profits or returns to be made as a result of holding and/or trading tokens.

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Scannavino Lamb LLP is a boutique law firm based in New York City offering legal and strategic advice to forward-thinking entrepreneurs, startup companies, and startup investors.  Founded by former Big Law lawyers with a range of experience in corporate law and business transactions, the firm serves its clients by blending world-class service with entrepreneurial perspective.  Check us out at www.scannavinolamb.com.

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