When the U.S. Securities and Exchange Commission cracked down on Munchee Inc. in December 2017 after it embarked on an initial coin offering, it was a wakeup call for any company marketing digital tokens.

Munchee was selling digital tokens to investors to raise $15 million in capital for a blockchain-based food review service app. The company wanted 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. But it was forced to stop its initial coin offering after the SEC said Munchee’s “conduct constituted unregistered securities offers and sales.”

“So, there was an SEC enforcement action, and then Commissioner Clayton made certain statements about ICOs,” Grant Fondo (pictured), a partner at Goodwin Proctor LLP, said about the current status of ICOs. “It has provided greater clarity about issuing utility tokens in the U.S.”

Fondo recently spoke with John Furrier (@furrier), host of theCUBE, SiliconANGLE Media’s mobile livestreaming studio, at theCUBE’s studio in Palo Alto, California. They discussed regulatory concerns over ICOs and utility tokens.

What to be aware of with utility tokens

Currently there are 1,384 cryptocurrencies and counting, according to Wikipedia. As such, governments are trying to keep up with nonsecurities cryptocurrency offerings, and blockchains are becoming increasingly popular because ownership can be reassigned to someone else without necessarily having legal frameworks and formal contracts.

Fondo is a crypto and ICO lawyer who has advised companies to focus on the marketing aspects of their utility tokens. His rule of thumb: When deciding on whether or not it is a pure utility token, one should ask themselves if people are buying with the idea that it will go up in profit and how they are selling the tokens.

A big surprise to Fondo is that the market has not slowed down, even after the federal guidance was issued. Companies are approaching lawyers and tax advisors, however, and Fondo is seeing “danger zones” emerge that are pushing companies to go offshore with their ICOs. The only way for these companies to secure investments is to set up a securities token, which is registered through the SEC, Fondo added.

“It removes the risk of ‘Are we a utility token or not?’” he said.

There are ways to prepare against the SEC, according to Fondo. First, decide whether or not to go the path of completely offshore (no U.S. money involved), review registration requirements with the Financial Crimes Enforcement Network and the SEC, create a cryptocurrency that defines the participant liabilities — what you’re doing and what risks are taken if the token is an unlicensed security — and understand the risks that if there is an exchange, the facilitation process works with the sales of the transactions.

Conducting due diligence is essential, according to Fondo, as well as understanding that “if it fails, you may not have any recourse.”

Fondo’s advice? Take a hard look at offering tokens and securities and locating the operation offshore, and consider avoiding both. Anything in the middle is risky, meaning pure utility tokens or fixed-price utility token models are still difficult paths to traverse.

Watch the complete video interview, and be sure to check out more of SiliconANGLE’s and theCUBE’s CUBE Conversations.

Photo: SiliconANGLE