SEC delivers a one-two punch on regulation of digital token sales

The regulator has taken enforcement action against a token seller and, on the same day, its Chairman delivered a personal statement on cryptocurrencies and initial coin offerings

What has happened?

The U.S. Securities and Exchange Commission (SEC) has certainly been busy in the area of cryptocurrencies and initial coin offerings (ICOs) lately, taking enforcement action against a token seller and with its Chairman delivering a personal statement on the topic on the same day.

What does this mean?

In the latest move by the Commission to regulate ICOs, on Monday, the SEC stopped an initial coin offering (ICO) from “Munchee”, a restaurant review app, for failure to register the tokens it was offering as a security.

The SEC said that California-based Munchee accepted the order and stopped its ICO, before any tokens had been issued, and returned to purchasers the proceeds it had received.

"The Munchee order provides useful guidance as the SEC strongly called out practices that we and other leading firms in the space have repeatedly warned clients about, such as making any statements about the potential appreciation in the price of tokens post-sale, and promising investors that they would facilitate the development of a secondary market in the tokens by obtaining listings on one or more exchanges," said Hogan Lovells New York capital markets partner Lewis Cohen.

The company was planning to raise $15 million by selling digital tokens to improve its app centered on restaurant meal reviews and create an “ecosystem” in which it and others would buy and sell goods and services using the tokens.

The order noted that Munchee had said through its website, a white paper and other means that its efforts would lead to an increase in value of the tokens.

The company also claimed that that it would take steps to create a secondary market.

The SEC's view was that, through such statements, investors "would have had a reasonable belief that their investment in tokens could generate a return on their investment", which would make them a security requiring SEC registration.

The SEC indicated that Munchee agreed to the order without admitting or denying the findings.

The Commission did not impose a penalty, in recognition of Munchee taking remedial action quickly and co-operating with the investigation.

Earlier this month, the SEC's newly created cyber unit obtained an emergency asset freeze to stop an ICO against PlexCorps, for allegedly defrauding investors.

That case is pending in Brooklyn federal court.

Warning by Chairman Clayton

A few hours after the Commission stopped the Munchee ICO, Chairman Jay Clayton issued a statement, aimed at both “main street” investors and market professionals, warning smaller investors of the potential risks of investing in cryptocurrencies.

“A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that... there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation,” Clayton said.

“If an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost,” he added.

Clayton recognised that ICOs can be an effective way to raise funds, including for innovative projects, but this should not detract from the need to comply with securities laws, where applicable.

"Any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require," he said.

"Chairman Clayton’s statement is a nuanced assessment of this new market and demonstrates time and energy spent understanding what is going on, warts and all. The statement clearly recognizes the viability of a market for digital assets that may (or may not) be 'securities'. However, investors need to apply common sense and seek legal guidance to ensure that they do not fall foul of the securities legal framework," said Lewis Cohen.

The statement ends with a list of sample questions that investors should ask themselves when considering a cryptocurrency or ICO opportunity.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.


Authored by Lewis Cohen



Theodore Mlynar
New York
Gregory Lisa
Washington D.C.


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