
SEC Shuts Down Munchee ICO - LearnerHerzog
https://techcrunch.com/2017/12/12/sec-shuts-down-munchee-ico/
======
zachruss92
Honestly, i'm kind of annoyed by everyone offering an ICO for [insert
irrelevant product here]. It's creating a misleading advertising scheme built
on top of a current tech _craze_ that will likely leave a lot of "investors"
out of money.

The problem is that you're giving money to a relatively unknown company while
speculating that the company will create inherent value. Unlike with stocks,
you don't have ownership in the company or any voting rights. There is nothing
stopping the company's creators from distributing the ICO money to themselves
(there might be a board, but since the company isn't public who knows who the
board is).

In this case the SEC is right to step in so there aren't a ton of unregulated
securities going around and a lot of consumers potentially getting screwed.

Even with cryptocurrencies like Bitcoin, it can be scary. You're literally
getting into the ForEx market, which is known to be one of the riskiest
markets in existence. With other currencies, at least they're backed by a
government that (at least at least attempts) to regulate it's value and
protect it from manipulation. With bitcoin, I saw that 40% of all coins in
existence are owned by less that 1,000 people. How do we know that the current
price inflations aren't a manipulation (or collusion) to jack up the price,
sell for USD, then crash the market? It's not illegal/collusion because
Bitcoin isn't regulated.

This is definitely a rant, but I have some serious concerns as to where this
market is going. Would love to hear other's thoughts.

~~~
Hermel
ICOs are in a hype. But there is real value. First, they can be used to bypass
a lot of (but not all) regulation. This is good, because the financial sector
is overly regulated (and wrongly regulated). Second, there are applications
that are not possible in the traditional financial system. For example, the
smart contracts behind the Bancor system (another overvalued ICO) provide
automated market-making on the blockchain. These smart contracts have a
capital buffer no one can touch and that is used for completely transparent
market making, thereby ensuring that you can always buy or sell shares. I
won't go into detail, but it basically solves the liquidity problem for penny
stocks.

In the medium run, I see ICOs as a light-weight alternative to IPOs, but not
as a seed-funding instrument. This is non-sense.

~~~
Sangermaine
>First, they can be used to bypass a lot of (but not all) regulation.

It's entertaining that many seem to believe this for no apparent reason, but
the SEC (and other regulators around the world) doesn't seem to agree.

~~~
dmihal
They allow you to avoid regulation if you avoid countries that regulate them
like the US. A number of ICOs these days seem to forbid US investors.

~~~
Sangermaine
The US isn't the only jurisdiction cracking down on ICOs:

European Financial Regulator Warns Investors On ICO Risks
[https://www.coindesk.com/european-financial-regulator-
warns-...](https://www.coindesk.com/european-financial-regulator-warns-
investors-ico-risks/)

Germany's Securities Regulator Warns ICOs Pose 'Numerous Risks'
[https://www.coindesk.com/germanys-securities-regulator-
warns...](https://www.coindesk.com/germanys-securities-regulator-warns-icos-
pose-numerous-risks/)

Japanese Financial Watchdog Issues Warning over ICO Risks
[https://www.coindesk.com/japanese-financial-watchdog-
issues-...](https://www.coindesk.com/japanese-financial-watchdog-issues-
warning-over-ico-risks/)

I can't imagine any developed nation won't end up regulating ICOs as
securities. That might be a message to which it's worth paying attention.

------
elmar
What Is the Howey Test? - FindLaw

[http://consumer.findlaw.com/securities-law/what-is-the-
howey...](http://consumer.findlaw.com/securities-law/what-is-the-howey-
test.html)

"The final factor of the Howey Test concerns whether any profit that comes
from the investment is largely or wholly outside of the investor's control. If
so, then the investment might be a security. If, however, the investor's own
actions largely dictate whether an investment will be profitable, then that
investment is probably not a security."

Howey Test [https://youtu.be/9lTS1Zofw8w](https://youtu.be/9lTS1Zofw8w)

~~~
delinka
This seems, to me (a layman), to indicate that most any ICO will fall under
"security." Can anyone provide an example where an ICO would not be a security
as defined by the Howey Test?

~~~
oskarth
Interestingly, cash would seem to be a security under this definition. Except
it is _explicitly exempted_ :

> The term ‘‘security’’ means any note, stock, treasury stock, security
> future, security-based swap, bond, debenture, certificate of interest or
> participation in any profit-sharing agreement or in any oil, gas, or other
> mineral royalty or lease, any collateral-trust certificate, preorganization
> certificate or subscription, transferable share, investment contract,
> voting-trust certificate, certificate of deposit for a security, any put,
> call, straddle, option, or privilege on any security, certificate of
> deposit, or group or index of securities (including any interest therein or
> based on the value thereof), or any put, call, straddle, option, or
> privilege entered into on a national securities exchange relating to foreign
> currency, or in general, any instrument commonly known as a ‘‘security’’; or
> any certificate of interest or participation in, temporary or interim
> certificate for, receipt for, or warrant or right to subscribe to or
> purchase, any of the foregoing; but shall not include currency or any note,
> draft, bill of exchange, or banker’s acceptance which has a maturity at the
> time of issuance of not exceeding nine months, exclusive of days of grace,
> or any renewal thereof the maturity of which is likewise limited.

From The Securities Exchange Act of 1934 (N.B. IANAL).

So, will cryptocurrencies, possibly including ICOs, be exempted? Only history
will tell.

~~~
stale2002
Nobody is saying that crytocurrencies 'in general' are going to be declared
securities.

This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something
that doesn't exist yet.

If Bitcoin was a security, the statement from the SEC head would be very
different.

~~~
oskarth
> Nobody is saying that crytocurrencies 'in general' are going to be declared
> securities.

I agree with you, but the fact is plenty of people do. Maybe not in the corner
of the world, but look broader. This also wasn't the point.

------
azernik
Related to this bigger HN submission from yesterday ("Statement on
Cryptocurrencies and Initial Coin Offerings"):
[https://news.ycombinator.com/item?id=15902054](https://news.ycombinator.com/item?id=15902054)

That statement was released on the same day as the Munchee decision, and the
Munchee decision is linked from the statement

Context (the Munchee decision is in footnote 6): "I urge market professionals,
including securities lawyers, accountants and consultants, to read closely the
investigative report we released earlier this year (the “21(a) Report”)[5] and
review our subsequent enforcement actions.[6]"

------
KyleTokenReport
To put this in perspective, Token Report analyzed its database of ICOs and
found each one that currently uses similar language to Munchee; or, promises
returns to investors. [https://medium.com/tokenreport/token-report-whos-been-
breaki...](https://medium.com/tokenreport/token-report-whos-been-breaking-the-
rules-only-12-icos-opening-this-week-c6820bff9602)

------
eximius
For better or worse, this sets a fairly clear precedent. Will be interesting
to watch people try to get around it.

~~~
deweller
I am a co-founder in the cryptocurrency space. Our lawyers were smart and
advised us against releasing a utility token ICO because they predicted that
these SEC actions would be coming.

Our approach to "get around" this is to file all the necessary paperwork for a
legal security and then only sell the token to accredited investors.

~~~
52-6F-62
So basically, follow the existing law that governs securities and investments.
I personally don't see a big problem with that, considering the laughable
scams that have occurred over the past six months.

I am curious, though, how that works with proposed international investors.
(I'm not well educated in the financial space)

I hope that these actions clear house of the scams, and open room for good
projects to exist without some shade of doubt cast over them—at least not for
the reasons there exists some kind of shade now.

~~~
erikpukinskis
> I personally don't see a big problem with that

It protects the monopoly the investor class has on investments like these.

~~~
kordlessagain
> It protects the monopoly the investor class has on investments like these.

False.

If anything, it exposes consistently _larger_ "chunks of value" to the risk
involved in the investment. Given accredited investors are used to evaluating
risk it simply allows the to participate freely in the unknown risks of these
types of investment vehicles without getting smaller investors involved in the
mix. (It also prevents them from using their position against lower investment
amounts made by lower accredited individuals.)

The "protection" afforded here is to the common investor, who by definition
does not carry a large store of value with them. By preventing them from
investing directly, by way of limiting their involvement based on their stored
values, the SEC is protecting the "collective stored value" of the lower
classes. And, this makes sense, given the dollar's value is based in part on
what people are willing to pay for a given set of objects. This is the
responsibility of the Fed to US.

An analogy would be the Yap allowing their children to go and mine Rai Stones
by themselves. No sensible society would allow this to occur, given the
dangers. And, yes, I'm comparing lower accredited investors to children, when
considering the amount of knowledge they may carry with them regarding risk.

~~~
justrobert
And yet anyone can buy 3x leveraged ETF/ETNs and not understand how the
products are structured. Some of those products, due to the structure, will
always lose value over time as the futures used to replicate them are normally
in contango.

So some financial products where they will always drift to zero are fine, but
investments in companies that have a chance to profit aren't allowed.

~~~
tptacek
You can create a company that has ludicrously limited opportunities to return
its capital, and sell those to the public. You simply have to comply with the
SEC's registration and disclosure rules --- in particular, you have to publish
quarterly audited financials confirming your limited prospects.

That is the difference between the "3x leveraged ETF" and the "company that
has a chance at profit" in your example, not some weird value judgement the
SEC is making.

------
thisisit
> In short, Munchee was undone by two things: depending on the token sale as a
> vehicle to raise cash for operations and using the typically spammy and
> scammy marketing efforts most ICO floggers use now, tactics taken directly
> from affiliate marketing handbooks.

It seems that most ICO do both the things. If not a self-inflicting post about
the token growth but at least the raising cash for operations part.

~~~
pm90
> It seems that most ICO do both the things.

That doesn't make it OK. I think what's happening here is that ICO's are
raising large enough funding to finally warrant involvement by the SEC.

------
nugget
I'm confused; if you can't use ICO proceeds to fund operations, then what can
you spend them on? Where is the money supposed to go?

~~~
CPLX
The money for funding operations is supposed to flow through a registered or
otherwise legal security instrument, which this ICO was not. The law hasn't
changed, just the supposedly innovative ways of pretending the law doesn't
exist.

------
Kiro
Is CryptoKitties a security then?

------
aresant
I just hope that the current ICO bubble doesn't pop so fast that HBO's Silicon
Valley misses the opportunity to skewer it next season.

------
elmar
What about CryptoKitties? is it a security using the "Howey Test"?

~~~
RexetBlell
Yes, because they pay dividends in the form of new baby crypto cats.

~~~
shawabawa3
That's not how it works.

The kitty tokens are more like a product than a security I think as each kitty
token is unique, but I'm not a lawyer

~~~
joering2
That's considered collectibles.

Take this difference, for example: if you buy a collectible Ford Shelby GT
from 1964 and you pay 10x more what the previous owner paid, you do so with
hopes that its a good investment into collectible that eventually someone will
give you a better price in the future. Your asumption/feeling of security
(hence name "securities" btw) is not guaranteed by anything more than hope
that someone will eventually pay more (they never may be such person).

Meanwhile if you buy Ford stock with the same purpose of re-selling it later
down the road for hopefully higher price, you are being reassured aka
"secured" by the company financial standing, their technical analyze, current
market value, future strategy for the corp, etc. If these are phony then
hopefully/supposedly SEC steps in to protect you from what most likely will
turn out to be scam. Collectibles (genuine one of course) do not come with
guarantee/security that their current value (what you personally gave for)
will remain in the future, or be repriced higher.

~~~
SilasX
Thank you for the explanation -- I was wondering how securities law is written
to exempt the classic-Ford case, when "investors" expect a gain in value that
isn't e.g. related to dividends but rather popularity quirks. Your distinction
makes sense.

~~~
joering2
You welcome!

------
philfrasty
„Munchee was able to return all $15 million to the 40 investors...“

Is this number correct? 40? 375.000$ on average seems unlikely...

~~~
pcmonk
The article is very misleading here. The cease-and-desist letter is
clearer[0]. They intended to raise $15 million, but the SEC stopped them
within a day of their ICO launch, when they had only raised about $60,000

[0]
[https://www.sec.gov/litigation/admin/2017/33-10445.pdf](https://www.sec.gov/litigation/admin/2017/33-10445.pdf)
Fact 27

------
rthomas6
These rules will only apply to companies within the jurisdiction of the SEC,
correct? Hypothetically, I don't see how the SEC could shut down ICOs from
companies registered outside the US, even from Americans.

~~~
itake
companies run into problems if American citizens "invest" in them.

------
emodendroket
It's about time.

------
PatientTrades
The hype will die down as the SEC gets involved and regulations are pursued.
Smart time to take profits in my opinion. Many will be left holding the bag as
we see a correction to more sustainable levels. Bitcoin is here to stay, but
these prices are not rational, driven purely off of emotion.

------
kelvin0
Seems to me they were not engaged in anything different from video games which
allow you to purchase ingame virtual currency. What's the difference? Genuine
question.

~~~
haldean
For one, there isn't a market where you can buy and sell them; usually the
developer decides on the price, and you can't exchange them back into USD.

~~~
cwkoss
Also, the terms of service usually forbid sale between individuals

------
bluetwo
What is the world of blockchain going to look like in a year?

------
nickbauman
I keep hearing pundits talk about cryptocurrencies as being "outside the
regulation of any government" over and over. They need to stop saying this.

------
vasilipupkin
why is ethereum itself not a security by this logic. Clearly the purpose of
buying ETH in the ICO was appreciation, no?

~~~
bluesign
as long as they don't promote 'increase in value' and 'gain on your
investment' they are safe.

~~~
vasilipupkin
but did they not make any statements implying an increase in value? why would
you have participated in ETH ICO if you didn't expect an increase in value?

~~~
bluesign
You can expect increase in the value, actually even everybody can expect, but
as long as there is no marketing of increase in value, or misdirection it is
fair game.

If you are investing in real estate, you have an expectation in increase in
value, but if the real estate agent is promising you, increase in the value,
and promising you to do the all marketing, etc and selling part. Then it is
something else.

The point is basically intentionally misleading investor.

~~~
vasilipupkin
where in the howey test does it say anything about marketing?

It is an investment of money There is an expectation of profits from the
investment The investment of money is in a common enterprise Any profit comes
from the efforts of a promoter or third party

~~~
bluesign
"Any profit comes from the efforts of a promoter or third party" this part.

As long as profit depends on someone else's work. (this third party is not
other investors, or market appreciation, this is direct promotion or work)

------
option_greek
I don't get how the SEC differentiates between ICOs and kickstarters (not
considering the ICOs that promise their token value to increase over time).
How can there be any kind of innovation in fund raising space if the SEC wants
every thing to be registered as securities. What bugs me the most is that many
ICOs are funded by virtual currencies (btc or eth) and still SEC considers it
self to have jurisdiction over the transactions that grown-up individuals do.
Instead of considering $1mil net worth investors are accredited, SEC should
have a certification test that an individual can take to prove he understands
finance. If someone has $1mil, it doesn't prove a damn thing. It could very
well be that they inherited it or won in a lottery.

~~~
proaralyst
I think it's because ICOs give you a tradeable token; kickstarter
contributions cannot be traded for profit.

~~~
option_greek
Contributors can as well sell their future orders as backorders on ebay or
amazon or directly. Many successful kickstarters had their products sold at
much higher prices after they are received (mainly the early bird ones).

~~~
tptacek
If the marketer of a Kickstarter promoted their product as an investment-grade
asset, they could indeed have legal problems. People forget that a big chunk
of what the SEC is concerned about is marketing and promotion.

