Right when everything seemed to be going well between the United States Securities and Exchanges Commission [SEC] and the cryptocurrency space, the SEC released a press statement on charging Kik Interactive Inc. for issuing a token, Kin, without registering it as a securities offering. The SEC also pointed out that the $100 million securities offering took place six weeks after the commission released The DAO report, advising issuers to comply with the securities law.
Robert A. Chen, the Chief of the Enforcement Division’s Cyber Unit remarked,
“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.”
The press release briefly explained all the stance taken by the commission to sue Kik Interactive. The commission “alleges” that Kik was incurring a loss for years on its messaging app, with the firm’s management “predict[ing] internally that it would run out of money in 2017.” Following this, the firm raised money via the sale of one trillion Kin tokens, $100 million in cash and Ethereum out which, $55 million was raised from U.S investors.
The press release stated,
“The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering. The complaint further alleges that Kik marketed the Kin tokens as an investment opportunity.”
This was followed by the commission stating that Kik “allegedly told investors” that the value of the token would increase with the demand while promising to do the groundwork to ensure an increase in its demand. This includes integrating the token on the messaging app, paving the way for transaction service and introducing a reward system that would incentivize companies adopting the token.
The commission also “alleges” that the firm did not have these services when it offered the sale of these tokens to investors, adding that “there was nothing to purchase using Kin”. Other allegations include enlisting the coin on exchanges/ secondary markets for trading purpose, and “Kik would profit alongside investors from the increased demand that it would foster.” More so, the commission also highlighted that the value of the token has seen a significant decrease in comparison to its value during the token sale.
Steven Peikin, the co-director of the SEC’s Division of Enforcement stated,
“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.”
Stephen D Palley, a well-known lawyer in the cryptocurrency space stated,
“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.
Interestingly, this announcement from the commission comes in days after Kin Foundation announced the launch of Defend Crypto initiative, where the foundation raised around $5 million. The sole purpose of this initiative was to get better regulatory clarity from the SEC in terms of the classification of security tokens.