U.S. SEC Is Charging Kik With Conducting a $100 Million Unregistered ICO

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."

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 that on 10 December 2018 Kik sent a 39-page rebuttal to the SEC, 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."

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."

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 SEC, 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 CEO said that his firm had already wasted $5 million arguing with the SEC, said that Kik was launching a crowd-funded legal defence fund (called 'Defend Crypto") with the goal of raising at least $5 million, and argued that this case was vital not just for the future of Kik but for the futue of crypto.

Last month, Kik CEO Ted Livingston said the company had already spent $5 million engaging with the SEC. Kik then launched a $5 million “Defend Crypto” crowdfunding campaign to support a potential lawsuit.

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.”

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