1/ OK HERE WE GO. Today, the SEC today confirmed some of our suspicions about utility tokens. I’ll summarize here in this thread. sec.gov/litigation/adm…
2/ At bottom, Munchee was offering the sale of tokens pre-functionality. In the SAFT framework, we call this a pre-functional utility token sale. saftproject.com/#saft-whitepap…
3/ In the whitepaper, we predicted that, because of the investor protection risks inherent in pre-functional utility token sales, they would be considered securities by SEC. That happened here.
4/ Not all pre-functional sales of course, but many. “functionality” is a useful heuristic.
5/ Munchee stated publicly that they wouldn’t even begin to create functionality in the platform until 2018 or 2019, but still sold the tokens in 2017.
6/ In the intervening time, Munchee promised they would use the money to “create an ecosystem”, and purchasers could “flip” the tokens for a profit once that was done.
7/ Importantly, the token’s pre-functionality is only half the story here. What lawyers call “manner of sale” doomed Munchee.
8/ SEC said “even if MUN tokens had a practical use” at the time of the offering, it wouldn’t preclude it from security status. Even if something has a practical use, the way its sold matters: terms of the offer, plan of distribution, economic inducements held out by the issuer…
9/ Finally, Munchee promised it would aid in creating a secondary market by getting the token listed on exchanges. Classic indicium of security status.
10/ So, what can we learn from this?
11/ SEC didn’t say a token needed to be functional prior to sale. Obviously, SEC can’t just use a heuristic like the SAFT framework. But the heuristic worked here, and predicted this outcome.
12/ Even if a token is functional when you sell it, if you pitch it as a security, you’re risking security status. Just using a SAFT document won’t cut it!
13/ So please, please, go talk to a lawyer before you take millions of dollars of someone else’s money by copy and pasting some terms you found on teh intarwebs.
14/ Is this good or bad for the industry, more broadly? Well, here are a few predictions:
15/ We will see fewer pre-functional token sales.
16/ We will see less discussion of the potential increase in value of the token. (depending on the circumstances, this could just mean self-censorship of the obvious)
17/ We will see fewer sales to groups, geographies, classes of people who could not possibly use the token for its intended use.
18/ We will see fewer ICOs of "b2b" tokens, where only a small, select group of users could ever use the tokens.
19/ We will see SEC provide more guidance by enforcement. Thankfully, the agency continues to exercise its discretion and treat these as "teachable moments" for those, like Munchee, who are not actually bad actors.
20/ We will see developers stop promising how they'll use the proceeds. If you're buying a functional product, it shouldn't matter how the seller uses your payment.
21/ This is another sign of the industry maturing. While we should remain vigilant for regulatory overreach (from SEC and others): So far they've taken a reasonable approach and should be applauded.
Fin @ 21 - let's not forget where we came from, eh?
Fin @ 21 - let's not forget where we came from, eh?
