14 BLOCKCHAIN, TOKEN SALES, AND SEC GUIDANCE GOODWIN applicability to a new paradigm – virtual organizations or capital raising entities that use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities.” The SEC further warned: “The automation of certain functions through this technology, ‘smart contracts,’ or computer code, does not remove conduct from the purview of the U.S. federal securities laws.” To the extent that U.S. federal securities laws apply to these new technologies, the SEC “stress[ed]” that individuals and entities raising capital through such technologies remain “obligat[ed] to comply with the registration provisions of the federal securities laws.” Remarks by SEC Chairman Jay Clayton (November 8, 2017) Following the release of the DAO Report, on November 8, 2017, SEC Chairman Jay Clayton provided additional guidance concerning the applicability of federal securi- ties laws to token sales conducted through distributed ledger technologies. Specifically, Chairman Clayton reiterated: “The Commission recently warned that instruments, such as ‘tokens,’ offered and sold in ICOs may be securities, and those who offer and sell secu- rities in the United States must comply with the federal securities laws.” Chairman Clayton further warned that federal securities laws likely apply to token sales: “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.” Munchee Inc., Securities Act Release No. 10445 (Dec. 11, 2017) Munchee, Inc. (“Munchee”) was a California business that created an application for people to review restau- rant meals. In October and November 2017, Munchee offered and sold tokens to raise capital to improve its application, and to recruit users eventually to buy advertisements, write reviews, sell food, and conduct other transactions using the tokens. In connection with the token offering, Munchee described the way in which the tokens would increase in value as a result of Munchee’s efforts, and stated that the tokens would be traded on secondary markets. On the second day of the token sale, Munchee was contacted by the SEC. Munchee stopped selling tokens within hours, did not deliver any tokens to purchasers, and returned to purchasers the proceeds that it had received. The SEC concluded that the Munchee tokens satisfied all four elements of the Howey test and, therefore, were securities under the federal securities laws: “Among other characteristics of an ‘investment contract,’ a purchaser of [Munchee] tokens would have had a rea- sonable expectation of obtaining a future profit based upon Munchee’s efforts, including Munchee revising its app and creating the [Munchee] ‘ecosystem’ using the proceeds from the sale of [Munchee] tokens.” The SEC further concluded that “Munchee violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying for exemption from registration with the Commission.” The SEC ordered Munchee to cease and desist from committing or causing any violations of Section 5(a) and 5(c) of the 1933 Act. The SEC explained that in deciding not to impose a civil penalty, the SEC consid- ered Munchee’s cooperation and remedial efforts. Remarks by SEC Director William Hinman at the Yahoo Finance All Markets Summit: Crypto, “Digital Asset Transactions: When Howey Met Gary (Plastic)” (June 14, 2018) During the June 14, 2018 Yahoo Finance All Markets Summit, William Hinman, Director of the SEC’s Division of Corporate Finance, explained that a token poten- tially can transform from a security to a non-security, The SEC concluded that the Munchee tokens satisfied all four elements of the Howey test and, therefore, were securities under the federal securities laws: “Among other characteristics of an ‘investment contract,’ a purchaser of [Munchee] tokens would have had a reasonable expectation of obtaining a future profit based upon Munchee’s efforts, including Munchee revising its app and creating the [Munchee] ‘ecosystem’ using the proceeds from the sale of [Munchee] tokens.