SEC Cryptocurrency Involvement

October 17, 2019

On our blog, we’ve covered quite a few issues related to cryptocurrency taxation and tax collection lately. What we haven’t talked about yet is initial coin offerings. Initial coin offerings, or ICOs, are similar to initial public offerings, which occur when a private company becomes publicly traded. We’ve seen multiple initial coin offerings in the past few years as new cryptocurrencies have sprung up. Token offerings have also come up in connection with new business ventures. We’ll look at one we will cover today. In the future, we’ll discuss other examples of SEC cryptocurrency involvement with the issuance of digital assets. Today, though, we’ll focus on the United States Securities and Exchange Commission, or SEC, crackdown on Munchee, Inc.

Company Vision

Before diving into the specifics of the ICO, let’s first discuss the Munchee company vision. Munchee intended to create an app which could be described as a combination of Instagram and Yelp for restaurant reviews. To raise money, Munchee launched a propriety digital token and was able to generate income from over 40 investors. The exact amount raised isn’t clear, but Munchee’s goal was to raise capital of $15 million. Munchee intended for users to be paid for restaurant reviews in its digital tokens. Further, users could expect that those digital tokens would be usable to purchase goods and services. Munchee would generate ad revenue through in app ad sales to restaurants and companies from other industries.

Virtual Currency Evolution

Virtual currency continues to expand its role in the commercial world. This case is a fascinating example of a new company using digital currency. It did so as a way to generate user engagement and drive up ad revenue. What the company didn’t see before it was too late, was the SEC cryptocurrency rules that applied to the transaction.

SEC Cryptocurrency and the Munchee Initial Coin Offering

The SEC’s Cyber Unit issued a “cease and desist” order on December 11, 2017. That action compelled Munchee to refund the money to investors. The reason for the order is due to the SEC’s classification of Munchee’s digital tokens as a securities offering in this context. Whether a given asset is a security can depend on how its use in a given context. In Munchee, the SEC found that the facts warranted classification of the Munchee tokens as securities.

Munchee Representations

Munchee made clear representations to investors that investors could reasonably expect the value of their tokens to rise, as the app increased in its popularity. What’s more, Munchee also stated that it was to create a secondary market for its proprietary tokens. This secondary market would also increase the value of the tokens offered in the ICO. This is a clear indication that Munchee intended for the tokens issued in the ICO to function as investment opportunities. Consequently, the cease and desist order was necessary, due to the fact that Munchee was in effect providing unregistered securities contrary to securities regulations. 

A Swift Refund

Munchee complied with the demands of the order and swiftly refunded money to investors. However, Munchee neither denied nor admitted to any of the federal securities law charges made by the SEC’s Cyber Unit. Due to its immediate cooperation, the Cyber Unit did not take further enforcement actions or penalize Munchee.

A Defensible Argument

Even though Munchee made a defensible argument that its digital tokens didn’t meet the criteria for classification as securities, the whole incident was very avoidable. Executives at Munchee could have averted the entire debacle. They could have, for instance, simply contacted a tax attorney with knowledge of cryptocurrency prior to the ICO.

Consult with a Tax Attorney

That’s why it’s imperative for crypto investors, and crypto creators, to get in touch with a qualified tax attorney prior to any purchase or ICO. Consult with a tax attorney. That way you can plan for your tax liabilities and also avoid running afoul of federal tax and securities laws. As we’ve discussed, the IRS (and other agencies, such as the SEC), are not going to turn a blind eye to cryptocurrency transactions. But because most cryptocurrency creators and investors haven’t kept up with IRS statements, we may see more incidents like the one involving Munchee in the future.

Contact MC&C for Additional Information

The bottom line is that if you’re planning to launch an initial coin offering, or invest in an initial coin offering, you need to know SEC cryptocurrency rules. At Mackay, Caswell & Callahan, P.C., we keep up-to-date with current news and developments in the world of bitcoin and other cryptocurrencies. We do this so we can stay ahead of the curve and deliver stellar service to our clients. If you’re planning to launch an ICO, the last thing you want is to have a repeat of this incident with Munchee, Inc. Yes, the executives at Munchee handled things well following the cease and desist order, but the ideal scenario would’ve been avoiding the order altogether. Get in touch with one of our top New York City tax attorneys today and we can help you avert or mitigate this issue.

Image credit: cryptocoin

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