On Tuesday (June 4), the U.S. Securities and Exchange Commission ("SEC") announced that it had filed a lawsuit against Kik Interactive Inc. ("Kik") for allegedly selling its "Kin" token to U.S. investors without registering its offer and sale. Since the SEC claims that this is in direct violation of the registration requirements of Section 5 of the Securities Act of 1933, it is aiming for "a permanent injunction, disgorgement plus interest, and a penalty."
In case you are wondering what "disgorgement" means, it is a legal term defined by Black's Law Dictionary as "the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion". It is "a remedy or penalty used in U.S. securities law."
What the SEC Is Alleging
Here are the main allegations in the SEC's complaint:
- "Kik had lost money for years on its sole product, an online messaging application, and the company’s management predicted internally that it would run out of money in 2017. "
- "In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens."
- "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."
- "Kik marketed the Kin tokens as an investment opportunity."
- Kik "told 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."
- "At the time Kik offered and sold the tokens... these services and systems did not exist and there was nothing to purchase using Kin."
- Kik "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."
According to the SEC's press release, Steven Peikin, Co-Director of the SEC’s Division of Enforcement, had this to say:
“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. Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
As for Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, he said:
"Kik told investors they could expect profits from its effort to create a digital ecosystem. Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
What Kik Has Been Saying About the SEC
In late January, The Wall Street Journal (WSJ) reported that it had been told by Ted Livingstone, the CEO of the Canadian social media startup, that it was "gearing up to challenge Washington’s ability to regulate the fledgling cryptocurrency industry."
The WSJ wrote:
"A court battle with Kik could help determine the scope of the SEC’s authority to tame the unruly ICO market, which has been used by legitimate startups and scammers alike to raise more than $20 billion since 2014. The SEC has taken aim at several token issuers, but a judge in a civil case has yet to rule on the central question of whether ICOs should be considered securities offerings. A loss for the agency could curtail its efforts to root out fraudulent offerings and give rise to a new crop of ICO scams."
Kik told the WSJ that "from the start it marketed kin not as a security but as a 'utility token' for developers and the foundation of a new ecosystem of apps and service, of which Kik would be one part."
The WSJ report also said that on 10 December 2018 Kik sent "a 39-page rebuttal" to the Wells Notice the SEC had issued in late 2018, in which it "argued the sale terms, in fact, don’t constitute an investment contract, and investors weren’t led to expect to profit on their purchase of kin."
In late May, the Kik said that it had already wasted $5 million arguing with the SEC, that it was launching a crowd-funded legal defense fund (called 'Defend Crypto") with the goal of raising at least $5 million, and that this case was vital not just for the future of Kik but for the futue of crypto.
The "Defend Crypto" website says that although $5 million has already been deposited to a Coinbase account, "with the future of crypto on the line," $5 million "might not be enough," and that is why it invites all crypto enthusiasts to contribute to this fund. Anyone who wants to contribute via this website can do so by selecting from a list of 19 cryptocurrencies and then sending some amount of the selected crypto to the Coinbase address shown, as can be seen in the following example:
At press time, $4,586,980 has been contributed (mostly by Kik itself) to the "Defend Crypto" fund. (The reason the USD value of the fund is less than $5 million is due to the fall in some cryptocurrency prices.)
According to Coindesk, Kik spokesperson Tanner Philp told them via a statement:
“This is the first time that we’re finally on a path to getting the clarity we so desperately need as an industry to be able to continue to innovate and build things.”
The Effect of This Announcement by the SEC on the Price of the Kin (KIN) Token
According to data from CyyptoCompare, today's news has not been kind on the price of the Kin token; at press time, KIN is trading at $0.00002426, down 33.35% in the past 24-hour period:
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