A California company raising funds through an initial coin offering for a service promising to take on Yelp Inc. has refunded subscribers after the Securities and Exchange Commission launched an investigation into whether it was raising funds illegally.

Munchee Inc. launched its ICO in October, promising to build a new platform “that looks to disrupt sites like Yelp and Google Places by introducing an immutable blockchain ledger for food reviews.” According to promotion material previously sent to SiliconANGLE, Munchee’s platform also promised a “new peer review system that uses Machine Learning to match submitted reviews with credible reviewers to make the entire process unbiased — ensuring the integrity of all food and restaurant reviews on their platform.”

A food review site may seem innocuous at first glance, but where the company came unglued was with its sale of tokens in the ICO. Although the tokens were planned to be used to allow users to be paid for writing food reviews along with site advertising and in-app purchases, Munchee also suggested that investors could expect an increase in the value of the tokens over time, bring it to the attention of the SEC.

“Investors would have had a reasonable belief that their investment in tokens could generate a return on their investment,” the SEC said in a statement. Therefore, it went on, the token is considered “a security based on the long-standing facts and circumstances test that includes assessing whether investors’ profits are to be derived from the managerial and entrepreneurial efforts of others.”

Munchee has consented to a cease-and-desist order from the SEC and has ceased its ICO and refunded investors without admitting or denying the findings in return for the SEC taking no further action.

The SEC announced in July that ICOs were subject to securities law, in particular registration and disclosure requirements, where the token offered constituted a financial security. The SEC’s first direct action against an ICO operator took place in October, but its first case based on securities law alone occurred last week when it obtained an emergency asset freeze to halt trading by PlexCoin.

In a separate statement discussing the ICO market in general, SEC Chairman Jay Clayton said that although ICOs “can be effective ways for entrepreneurs and others to raise funding, including for innovative project,” investors need to remaining highly vigilant.

“Investors should understand that to date no initial coin offerings have been registered with the SEC,” Clayton said. “The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.”

The news of Munchee’s shutdown comes as a new report indicates that despite the number of ICOs coming to market continuing to surge, their failure rate is also rising. According to Token Report, the rate of new ICOs opening is on pace to reach 500 this quarter, compared with 266 that opened in third quarter. About one in five ICOs on average were failing to complete their token raises.

Picture: insatiablemunchies/Flickr