The U.S. Securities and Exchange Commission (SEC) blocked the release of the Munchee ICO, a coin offering for a restaurant review app, because the company did not register it as a security with the SEC.

The chairman of the SEC, Jay Clayton said, “A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that … there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”

According to Clayton, “If an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.”

Securities come in two forms: debt and equity. Debt securities, also known as fixed-income securities, include bonds and CDs. Purchasing a debt security is akin to providing a loan to the company or government entity that issued it. Equity securities, or stocks, provide a stake in the company to the buyer upon purchase. Many ICOs would likely fall into one of these categories, even if the coins or tokens are exchanged for other digital currencies and not actual dollars. The results of a report issued by the SEC on July 25, 2017 determined that, “issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.”

Before its ICO was shut down, Munchee was offering “MUN” tokens, backed by Ethereum. In addition to buying tokens, users could earn them by carrying out social activities and uploading photos that generated a lot of likes. These tokens could then be used as a payment method at participating restaurants. It does not appear that MUN tokens were offered either as debt securities or equity securities. Rather, they appear to have been used as a rewards system, similar to points one might earn for making purchases with a credit card, which could then be redeemed for merchandise. Munchee still chose to comply with the SEC and to refund all MUN purchasers.

Unlike Yelp and other popular websites that focus on overall ratings for restaurants, Munchee places emphasis on the individual dish consumed. Similar to a food board on Pinterest with the realtime feel of Instagram and Snapchat, a user will snap a shot of their meal in progress and pin it to a real-time feed that other users have access to. Participants are then encouraged to become local food influencers and trend-setters, and to grow their followings as they unlock rewards at various levels of engagement.

In some ways, Munchee benefited from the SEC crackdown. They received free press as a result, as well as links to their website from authoritative publications reporting on the outcome. As the SEC continues to crack down, other companies may not be so lucky. Fines and worse punishments for noncompliance could end in financial ruin, or worse for unwitting startups and entrepreneurs.

The takeaway from this most recent enforcement action by the SEC against an ICO was that it would take action for non-registration and other violations, even when there are no claims of fraud, and even when the ICO does not appear to function as either a debt security or an equity security. In the case of Munchee, it may be related to their announcement of a goal to raise $15M by selling MUN coins. In addition, the SEC stated that investors could expect to see a return on investment in MUN coins, and this in and of itself was enough for the ICO to be considered a security.

Enforcers like Clayton may see the enforcement of regulations as a preventative measure against circumstances where “there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.” As part of this strategy, the SEC created a cyber unit and filed its first ICO charges against PlexCorps, a privately held company.