Move Aside EPA, The SEC Is Now Regulating Ecosystems!

I don't hear many securities lawyers talking about "ecosystems".  Indeed, I think of the word as being more the province of environmental lawyers.  The word itself is an amalgamation of two Greek words - οἶκος, meaning house, and σύστημα, meaning a whole formed from many parts.  Most people think of the "ecosystem" as the interconnection existing in the natural world.

The Securities and Exchange Commission, however, does not take so cabined a view.  In a press release issued yesterday, the Commission announced that an "ecosystem" could indeed be a security:

A California-based company selling digital tokens to investors to raise capital for its blockchain-based food review service halted its initial coin offering (ICO) after being contacted by the Securities and Exchange Commission, and agreed to an order in which the Commission found that its conduct constituted unregistered securities offers and sales.

According to the SEC’s order, before any tokens were delivered to investors, Munchee Inc. refunded investor proceeds after the SEC intervened.  Munchee was seeking $15 million in capital to improve an existing iPhone app centered on restaurant meal reviews and create an “ecosystem” in which Munchee and others would buy and sell goods and services using the tokens.  The company communicated through its website, a white paper, and other means that it would use the proceeds to create the ecosystem, including eventually paying users in tokens for writing food reviews and selling both advertising to restaurants and “in-app” purchases to app users in exchange for tokens.

In the accompanying cease and desist order under Section 8(a) of the Securities Act, the SEC makes clear that it is applying the famous "investment contract" analysis under SEC v. W. J. Howey Co., 328 U.S. 293 (1946), and its progeny, including the cases discussed by the SEC in its Report of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017). 

The respondent in the case, a company named Munchee, Inc., put up no real defense.  It launched its initial coin offering (ICO) on October 31, 2017 and terminated it the next day within hours of being contacted by the SEC.