SEC Strikes Back at Kik

Kik pokes SEC, SEC sues Kik.

Last week, we talked about the Defend Crypto movement where Kik, the messaging platform, decided to challenge the SEC to get more clarity in regulation for crypto-economy companies. And they recruited others to join their fight by starting the Defend Crypto fund, which they’ve seeded with $5 million and are seeking outside contributions.

But have they flown too close to the sun like the mythological Icarus? Kik poked the SEC and the SEC is poking back. Lawsuit filed.

Tony Zerucha, one of my secret weapons from the Bankless Times, brings us a followup piece on Kik, Defend Crypto, the SEC and the new lawsuit filed this week.

Story #1: SEC Sues ICO Issuer Kik

by Tony Zerucha, Bankless Times

Kik Interactive decided to pick a fight with the Securities and Exchange Commission (SEC) and the regulator is hitting back by launching a lawsuit against the Canadian company for allegedly conducting an illegal ICO. The token sale was conducted even though the offer and sale were not registered as required by U.S. securities laws.

In a statement the SEC said Kik lost money for years on its only product, an online messaging application. After Kik management supposedly predicted it would run out of money in 2017, the company pivoted to a new business financed by the token sale.

“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 in a release. “The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.”

Kik marketed the sale as an investment opportunity, allegedly telling investors the token’s value would increase in tandem with consumer demand propelled by Kik’s efforts which were to include

  • incorporating the tokens into its messaging app

  • creating a new transaction service and

  • building a system which would reward businesses adopting Kin.

“At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin,” the SEC added. “Kik also allegedly claimed that it would keep three trillion Kin tokens, Kin tokens would immediately trade on secondary markets, and Kik would profit alongside investors from the increased demand that it would foster.  The Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. 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.”

“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.”

Note that Kik Interactive is a Canadian company that didn’t conduct an offering at home due clear guidance they received from Canadian regulators that they considered Kin a security.

Legal Experts Weigh In

Great work as usual, Tony. Here is what some of the best legal minds in the crypto-economy had to say.

Jake Chervinsky wrote a thread with his thoughts and analysis.

One of the most important things in this analysis, and you should read the thread, is that any real action on this trial, motions to dismiss, anything are probably years away.

Joshua Ashley Klayman goes a bit deeper, specifically talking about SAFT tokens in this thread.

SAFT means simple agreement for future tokens and SAFTs are securities but the future tokens issued may not be. Joshua argues that the SEC is saying both the SAFT is a security and the Kin tokens issued are too.

Stephen Palley, a virtual currency lawyer and litigator in DC, analyzes with screenshots of the SEC suit what the SEC is doing and why. This is some good ‘inside baseball’ for those interested in the legal wranglings of crypto and why some of our regulatory agencies do what they do.

You can see just in the first tweet of the thread that the SEC pulls no punches on Kik. The suit states that they had to list this ‘unregistered security’ because they had no other fundraising options as a money losing, unsuccessful company.

For less than that coffee you have in your hands, you can get in depth, actionable news like this in your email every week. No nonsense, just news.

Palley goes on to say the Wells notice, which is a notification from the SEC that allows a company time to respond to explain their position why they don’t think they are a security, and Kik’s poor response was probably why Kik initiated the Defend Crypto idea and fund last week. Kik may have used Defend Crypto as a preemptive strike against the SEC, who Kik knew would not except their arguments and probably file an enforcement action or suit.

Samuel Katz, a securities attorney, sees the Kik response to the Wells notice as positive, yet the case may still be ‘unwinnable’. Here’s his thread.

Katz thinks legislation may ultimately be the answer as there is a legitimate case to make that the Howey test for what is a security? may not be relevant for digital assets due to how they are mined, distributed, held in wallets or in custody and other reasons. Katz concludes his excellent thread by saying that registries and disclosures like Messari is working on is the way to move the whole industry ahead in the future.

Our CNON Take: Tony is on top of the news yet again, and now we have some more clarity just from a week ago. A week ago, I didn’t know what to think since I thought the Defend Crypto idea was worthy but was not so sure about Kik/Kin and if they are the right kind of test case for the SEC for digital assets or not.

Turns out, my opinion doesn’t matter. They poked the bear and now the bear is poking back with a lawsuit.

I don’t usually like getting bogged down in legal details, however the SEC has incredible influence not just on our industry but whether innovations of this type can happen in America. It’s very possible in the near future that these companies will need to go to Malta, Switzerland or Puerto Rico to set up and operate.

Here’s what I hope will happen:

  • Groups like Messari, other token registries, Nomics, and others can help (with our help as a community) define the industry standards we desperately need

  • That we can get clarity on who can invest in digital securities from the SEC, especially for informed retail investors

  • That we can get an ‘adjustment’ of the Howey Test for how digital assets are treated

Here’s what I think WILL happen:

  • Kik will settle or lose the lawsuit. They could stay in business long enough to get to a legal decision but going out of business is an option too

  • In 3 years, we will have better industry standards but it won’t matter to the SEC

  • Within 5 years, cryptoeconomy companies will re-domicile in jurisdictions where the regulation is better known and understood

  • The cryptoeconomy focus will move towards Asia permanently

Just because now you see something called an IEO instead of an ICO, don’t assume that it is a legal, let alone worthwhile investment. Sometimes the best investment decisions are the ones we don’t make. We will be watching what the SEC does with this very closely, as well as the Defend Crypto movement as it has many heavy hitters from the industry backing it.