decrypt.co
The US Securities and Exchange Commission (SEC) has fired a new volley of arguments in the legal battle against Canadian corporation Kik, best known for its eponymous messaging app.
The regulator’s latest document, filed on March 20, implies that Kik knew its $100 million initial coin offering of Kin token, the native currency of a blockchain network aimed at social media, could potentially be deemed an unregistered securities sale, and thus illegal.
Yet the company decided to go on with the plan anyway.
According to the SEC, Kik’s defense is that Kin token is a currency and not an “investment contract,” which would mean it would have not to be registered with the regulator. Kik also said that the latter term itself is “unconstitutionally vague,” implying that it didn’t know whether it might apply due to lack of clear advice.
The SEC’s latest filing refutes this. The regulator argued that Kik raised with its insurance broker that very risk—whether Kik’s token sale would not constitute a securities sale under the Howey test, a decades-old yardstick that the SEC uses to determine whether something is a security.
It claims that Kik was seeking $10 million in additional insurance for officers and directors for legal defense costs.
“Kik for months considered—and actively planned for—the potential application of Howey to the Kin offering. Kik received explicit warnings in a report from its consultant that regulators could find that the offer and sale of Kin would be an offer and sale of securities,” the SEC’s document reads.
Speaking to Decrypt, crypto lawyer Gabriel Shapiro said this is one of the strongest parts of the SEC’s argument—and perhaps the one that will decide the final outcome of the case.
“Kik's affirmative defense is that the term ‘investment contract’ is so vague that Kik lacked notice it might apply,” said Shapiro. “The fact that it took out insurance to cover the risks shows that it was far from lacking notice—one among many reasons why ‘investment contract’ is not unconstitutionally vague,” Shapiro told Decrypt.
1/n The SEC has filed its motion for summary judgment in its case against KIK. https://t.co/1UeoKJ81uB
Brief thread focused on novel/noteworthy elements, infra:
— _gabrielShapir0 (@lex_node) March 21, 2020
Was profit expected?
The SEC also insists that Kin’s investors clearly expected profit—and the company encouraged it—which is another characteristic of a securities sale.
"Investors bought Kin in such large quantities that their purchases only can only be logically explained by an expectation of profits," the regulator’s filing continues.
According to Shapiro, this argument alone may be sufficient to establish a reasonable expectation of profits.
Furthermore, some investors bought Kin at a 30% discount compared to the public sale price, which gave them an obvious profit opportunity, the filing adds.
“Reasonable expectation of profits is one element of the Howey test and the facts cited are evidence that the buyers' of Kin had a reasonable expectation of profit. Whether Kin might also be useful for something is not really an issue,” Shapiro said.
To further prove its point, the SEC also noted that Kik repeatedly vowed to integrate Kin into its messenger and promised to develop the ecosystem. This would increase the value of tokens, another reason to believe that investors expected profits.
The SEC's filing yesterday asks the court to issue a summary judgment against Kik. Essentially, this motion means that, based on all of the facts applied to the law and based on evidence that neither parties dispute, there is no way Kik could possibly win the case.
The prolonged legal dispute with the regulator proved costly for Kik. Its 300 million-strong messaging app was almost shut down last October, and the Kik corporation laid off the bulk of its staff. With emptied coffers, can Kik hold on long enough to fight its cause?