Canada: SEC Order And Chairman's Statement Provide Further Guidance For Token Offerings

Following its investigative report in the DAO case1, the U.S. Securities and Exchange Commission ("SEC") has now provided further guidance on when a token constitutes a security — this time, as a part of a cease and desist order (the "Order") against Munchee, Inc.'s ("Munchee") initial coin offering. The Order provides substantive guidance on the application of U.S. securities laws to the process of offering tokens through which a growing number of entrepreneurs seek to raise capital to fund the development of new businesses. The SEC chairman, Jay Clayton, concurrently issued a public statement expressing his general views on the cryptocurrency and ICO markets.

SEC Order


In issuing the Order, the SEC set forth the relevant facts, which included the following:

  1. Munchee is a California-based business that created an iPhone application ("Munchee App") for people to review restaurant meals.
  2. Munchee offered and then sold digital tokens ("MUN" or "MUN token") issued on the Ethereum blockchain in order to raise approximately $15 million in capital so that it could improve the Munchee App and recruit users to eventually buy advertisements, write reviews, sell food and conduct other transactions using MUN tokens.
  3. In connection with the offering, Munchee described how MUN tokens would increase in value as a result of Munchee's efforts and stated that MUN tokens would be traded on secondary markets including one in the U.S.
  4. Munchee published its White Paper ("MUN White Paper") that described MUN tokens, the offering process, how Munchee would use the offering proceeds to develop its business, the way in which MUN tokens would increase in value, and the ability for MUN token holders to trade MUN tokens on secondary markets.
  5. In the MUN White Paper, on the Munchee Website and elsewhere, Munchee and its agents further emphasized that Munchee would run its business in ways that would cause MUN tokens to rise in value and emphasized to purchasers how they could benefit from those efforts.
  6. Munchee also stated that it would work to ensure that the MUN token would be traded on secondary markets which would include at least one U.S. exchange within 30 days of the offering.

SEC Analysis

In the Order, the SEC applied the tests from the U.S. Supreme Court case, SEC v. W.J. Howey Co. ("Howey") to determine when an instrument constitutes an "investment contract" under U.S. securities laws. The SEC found that purchasers of the MUN tokens would have reasonably viewed the offering as an opportunity to profit based on the MUN White Paper as well as comments made by Munchee on Facebook and other social media on the expected appreciation of the MUN tokens. It also found that purchasers had a reasonable expectation of obtaining a future profit from buying MUN tokens if Munchee was successful in developing its business. The SEC held that purchasers would reasonably believe that they could profit by holding or trading MUN tokens, regardless of whether they ever used the Munchee App or otherwise participated in the MUN "ecosystem".

The SEC also noted that the marketing of the MUN tokens did not use the Munchee App or otherwise specifically target current users of the Munchee App to promote how purchasing MUN tokens might allow them to qualify for higher tiers and bigger payments on future reviews. Nor did Munchee advertise the offering of MUN tokens in restaurant industry media to reach restaurant owners and promote how MUN tokens might let them advertise in the future. In applying the test in Howey, the SEC observed that the targeted purchasers were people with an interest in tokens or other digital assets that had recently created profits for early investors in initial coin offerings ("ICOs"). These purchasers were accessible through forums aimed at people interested in investing in Bitcoin, including, a message board for investing in digital assets.

Referencing the experience of Munchee's founders, who had worked at prominent technology companies, and their skills running businesses and creating software, the SEC found clear evidence that MUN token purchasers would have had the reasonable expectation that Munchee and its agents would expend significant efforts to develop an application and "ecosystem" that would increase the value of their MUN tokens. The MUN tokens would also pass the test from Howey requiring "purchasers to benefit from the efforts of others" because the stated goal in the MUN White Paper was that the value of MUN tokens would depend on Munchee's ability to develop the Munchee App and create a valuable "ecosystem" that would inspire greater use of the MUN tokens. In effect, the "reasonable expectation of profit" test had been met because the proceeds of the MUN token offering were intended to be used by Munchee to build the "ecosystem" which would create demand for MUN tokens and make MUN tokens more valuable.

Munchee would undertake changes to the MUN token so that people could buy and sell services using MUN tokens and the MUN token could be used to recruit restaurants willing to sell meals for MUN tokens. Investors therefore reasonably expected that they would profit from the resulting increase in value. This feature, coupled with the promise of a secondary trading market for the MUN tokens shortly after the offering, led the SEC to conclude that investors' profits were to be derived from the significant entrepreneurial and managerial efforts of others — specifically, Munchee and its agents.

In the final analysis, the SEC observed that Munchee had offered and sold securities to the general public without filing a registration statement under U.S. securities laws or the availability of an exemption from registration requirements. Despite the violation of U.S. securities laws, the SEC decided not to impose a civil penalty in light of Munchee having ceased to offer its tokens shortly after being contacted by the SEC and making restitution by returning to purchasers the proceeds that it had received.

Determinative Test

The following material considerations from the Order provide useful guidance to determine whether a token constitutes a security under U.S. securities laws:

  • Is the token a "pre-functional utility token", a term that has been used by some commentators to describe a token offered at a time when further work by the issuer of the token is required in order to develop the "system" within which participants in the network (in Munchee, the restaurants, food critics and reviewers, restaurant customers and others) are expected to exchange the token for goods and services?
  • Are the future efforts of the issuer of the token and any promise to establish a trading system for the token expected to result in the increase in value of the token?
  • Is the token offering targeting investors in tokens and cryptocurrencies as opposed to users or participants in the system?

If the answers are yes, then the token at hand may well constitute a "security" token, which if offered for sale would require compliance with registration requirements under U.S. securities laws.

Public Statement by SEC Chairman

On the same day that the SEC issued the Order, SEC Chairman Jay Clayton issued a statement regarding the cryptocurrency and ICO markets ("Statement"). After observing that the cryptocurrency and ICO markets have grown rapidly and that ICOs can be effective ways for entrepreneurs to raise funding for innovative projects, the Statement expresses concern over the reduced investor protection in these markets compared to traditional securities markets. Some important takeaways from the Statement include the following:

  • Form over substance. Replacing a traditional corporate interest such as a share in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction but it does not change its substance.
  • Utility. Simply structuring a token to have some "utility" does not prevent a finding that the token constitutes a security.
  • Expectation of Profits. Offerings that involve marketing efforts emphasizing the potential for profits based on the entrepreneurial or managerial efforts of others will likely attract the token in the realm of a security.
  • Are cryptocurrencies securities? The answer to this question depends on the character and use of the specific digital asset. The Statement analogizes recent token sales to, and distinguished between, tokens that represent participation interests in a book-of-the-month club versus a yet-to-be-built publishing house: the book of the month club token sale might not implicate securities laws but would be an efficient way for the club's operators to purchase more books and pay for distributing them to the members, whereas the publishing house had yet to secure authors, books or distribution networks. The token in the former fact scenario may not constitute a security while the latter token likely would.


We anticipate that both the Order and the Statement may cause Canadian securities regulators to provide additional guidance on what forms of distributed ledger or blockchain-enabled tokens will constitute a security under Canadian securities laws, continuing a period of enhanced regulatory scrutiny of crypto-assets in Canada.2

The Order and the Statement also highlight the ongoing struggle faced by regulators as they seek to facilitate innovative ways to raise capital and promote growth, while also ensuring investors and markets are protected.

We encourage those involved in the blockchain community and other market participants to be mindful of applicable securities laws and to contact us with any questions.

The author wishes to acknowledge and thank Charles Malone, Practice Support Lawyer in BLG's Securities and Capital Markets Group, for his review and editing of this bulletin.


1 Please see our recent bulletin: To Be or Not To Be (a Security): Regulatory Oversight of Crypto-Assets (August 1, 2017)

2 Please see our recent bulletin: CSA Increases Regulatory Clarity in the Cryptic World of Digital Currencies (August 28, 2017)

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions