SEC Charges Kik (KIN) for Running Unregistered ICO, Could Clarify Crypto Regulations
The United States Securities and Exchange Commission announced today that it is suing Kik Interactive Inc. for conducting an illegal $100 million ICO.
— Kin Ecosystem (@kin_foundation) June 4, 2019
The SEC claims Kik sold tokens to U.S. investors without registering their offer and sale as required by U.S. securities laws. As a result, Kik’s ICO in 2017 is considered an unregistered sale of securities.
Kik is a free messaging app made by Canadian company Kik Interactive. The app has around 300 million users and is particularly popular among teenagers. One report from 2016 indicated that 40% of American teenagers were using Kik.
In 2017, Kik announced plans to launch its own ICO. The company planned to sell ‘Kin’ tokens to the public. The SEC claims Kik made this decision after the company “had lost money for years on its sole product, an online messaging application.”
The SEC filed the complaint in the Southern District of New York on Tuesday, claiming that Kik violated Section 5 of the Securities Act of 1933, which requires offerings to be registered.
It’s not the first time Kik has faced concerns about its 2017 ICO. Soon after the ICO took place, the Ontario Securities Commission warned the Waterloo, Ontario-based company that Kin tokens could be considered securities. Earlier this year, Kik told the Wall Street Journal that it would take the SEC to court if the agency brought enforcement action against the Kin token sale.
Kik Sold $100 Million of Digital Tokens During the ICO
Kik’s sale of 1 trillion Kin tokens raised $55 million from investors in the United States and a total of $100 million worldwide. The tokens were made available at a discounted price to wealthy purchasers. Today, the tokens are trading at roughly half of what their value was during the ICO.
Of course, Kik’s token sale took place during the height of the ICO craze of 2017. Kik was also one of the biggest names to dip its toe into the ICO space. The token sale attracted considerable traction and media attention. It was very successful for Kik.
The SEC doesn’t disagree that the ICO was successful, but they do allege that the ICO was an unregistered sale of securities:
“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 in a statement released by the SEC on June 4.
“Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
Do Kin Tokens Really Function Like Securities?
It’s not illegal to sell random digital tokens online. However, if those digital tokens function like securities, then your sale of digital tokens could be considered an unregistered sale of securities – which is what today’s complaint from the SEC is alleging.
Part of the problem was with the way Kik marketed the sale to investors. Kik allegedly sold tokens to investors by telling investors they could expect to earn profits from the Kik digital ecosystem:
“Kik told investors they could expect profits from its effort to create a digital ecosystem,” said Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit.
“Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
The SEC is taking a similar approach to the Kik case as it has with other unregistered security sales: even if a company is selling an arbitrary digital token, the token could still be considered a security if it matches the qualities of a security. “If it walks like a duck and talks like a duck” is the phrase often used in situations like this.
The SEC claims that Kik told investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand. Kik planned to incorporate Kin tokens into its messaging app, for example, and create a full Kin transaction platform. In the long-term, Kik envisioned a future where other companies began to adopt Kin as a reward token as well.
At the time Kik launched its token sale, none of these services existed. As the SEC’s complaint claims, “there was nothing to purchase using Kin.” In other words, investors were buying Kin tokens based purely on the idea that they would increase in value as Kik added more products and services to its network.
Kik also claimed that it would keep three trillion Kin tokens, and that Kin tokens would immediately trade on secondary markets, or that Kik would profit alongside investors from the increased demand it would create.
As the SEC complaint sums up:
“The Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws.”
The SEC is charging Kik Interactive with violating the registration requirements of Section 5 of the Securities Act of 1933. The SEC is seeking a permanent injunction, disgorgement plus interest, and a penalty.
It seems like Kik has been anticipating enforcement action from the SEC for some time. Last month, Kik CEO Ted Livingston said his company had already spent $5 million engaging with the SEC.
“The SEC has been shaping the future of crypto behind the scenes with settlements that set a dangerous precedent and stifle innovation.”
A total of $4.6 million has been raised through the campaign thus far.
The case between the SEC and Kik could be bad news for Kik. However, any rulings that come from this case could grant further regulatory clarity to the SEC’s stance on tokens, including whether or not utility tokens and similar cryptocurrencies are considered securities under U.S. regulatory laws..
SEC v. KIK: One of the challenges inherent in defending an SEC investigations is that they give the commission the ability to do significant discovery before filing a lawsuit, as this one shows.
If you poke the bear better have bear proof arguments to muster in response. pic.twitter.com/c4nhr9wfXh
— Palley (@stephendpalley) June 4, 2019