SEC Sues Kik Interactive For Conducting $100M USD Unregistered ICO

ICO News, News, Regulation | June 5, 2019 By:

The US Securities and Exchange Commission (SEC) has sued social media company Kik Interactive for conducting a $100 million initial coin offering (ICO) in 2017, which the regulator deemed as an unregistered security issuance.

In its complaint, the SEC charges that Kik sold its Kin tokens to US investors without registering their offer and sale as required by the US securities laws. The agency alleged that company used the money raised in the ICO to fund a new type of business because it had lost money for years on its sole product, an online messaging application.

“Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors,” the SEC said. “The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.”

Kik reportedly marketed the Kin tokens as an investment opportunity, promising investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand, including by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin. The SEC, however, alleges that these services and systems did not exist and there was nothing to purchase using Kin at the time Kik offered and sold the tokens.

The SEC said that the Kin ICO involved securities transactions, which means Kik was required to comply with the registration requirements of the US securities laws.

“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”

In its response, Kik Interactive said that they have been expecting this for quite some time, and they welcome the opportunity to fight for the future of crypto in the United States.

“We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps,” said Kik CEO Ted Livingston. “Kin is being used by more people in more apps every day, and come trial, Kin may be the most widely used cryptocurrency in the world. While the SEC’s actions are a challenge to overcome, they won’t affect the use, transferability and characterization of Kin, and we expect momentum in the Kin Ecosystem to only continue to grow.”

Eileen Lyon, Kik’s General Counsel, said that the SEC’s complaint against Kik is based on a flawed legal theory.

“Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a ‘common enterprise’; and that any contributions by a seller or promoter are necessarily the “essential” managerial or entrepreneurial efforts required to create an investment contract,” Lyon said. “These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny.”

Last month, The Kin Foundation launched a $5 million Defend Crypto Fund to protect against the SEC enforcement. ShapeShift, Arrington XRP Capital, Messari, and Fight for the Future have come forward to support Kin in this initiative.

According to Daniel Fuke, a partner in the Securities and Mergers & Acquisitions practice groups of Canadian law firm Fasken, the dispute raises multiple pressing issues which need to be resolved amid the proliferation of digital currency offerings.

“It’s important for the industry that regulators’ interpretations of the law are being challenged,” said Fuke. “The SEC’s test for whether an offering is a ‘security’ is outdated and didn’t contemplate digital assets. This challenge is clearly needed.”

Fuke adds that Kik has “a number of strong supporting arguments” that its tokens are not investment securities, such as the relatively small amounts that Kik sold to each purchaser. But he notes that other aspects weigh against that interpretation, “such as the fact that their local regulator, the Ontario Securities Commission, came to the preliminary conclusion that its tokens were securities.”