The SEC is taking Kik to court over securities fraud. A recent report from the SEC detailed a number of areas where Kik went wrong with their ICO. While we can’t change the past, we can build the future. This article looks at some of the key arguments put forward by both sides — but does Kik really stand a chance? The public battle of SEC Vs. Kik will give us a chance to see the way the SEC is thinking. The cards are on the table, and so is Kik’s future.
So What happened?
This month saw the start of what we expect to be the most significant case to date. Kik, the Tencent-backed messaging app, held an ICO in August 2017 raising $150 million. In November 2018, the SEC notified Kik it was thinking of pursuing an enforcement action for violating U.S securities law through the token sale.
Investment contracts are transactions where an individual invests money in a common enterprise and reasonably expect profits to be derived from the entrepreneurial or managerial efforts of others.
Why do Kik think they can beat the SEC?
The team at Kik feel confident that they have conducted their raise in such a way that it should not fall within existing securities regulation and have said they are prepared to battle the SEC on this issue in an open court. In response to the SEC’s action, Kik issued a response with a number of arguments representative of how the entire industry is feeling — We did all we could, but ultimately the Howey Test needs to be reconsidered in a digital age.
The reasons Kik said they did NOT offer a security token;
i. The use of their cryptocurrency, called “Kin” is focused on usage since it’s integrated with Kik’s millions of active users on the messaging app.
ii. The company has a track record of trying to find an alternative to ad-based monetization of digital goods and services — making the case that this is a way to differentiate from FAANG companies.
iii. They enforced strict KYC / AML policies, paid taxes on token sale revenues and restrict themselves within certain jurisdictions.
The SEC responded to Kik’s comments with a comprehensive rebuttal. A few of the points they made include;
i. Kik received investment and subsequently delivered Kin tokens that had been purchased, pursuant to the contracts’ terms.
ii. An email from the CEO to employees actively states the increased demand of Kin tokens in the future will provide “a potential return…(that)…encourages investors to buy-in at an ICO”.
iii. Kik actively promoted Kin and the prospect that Kik’s future efforts to develop the Kin ecosystem would drive an increase in Kin’s value.
iv. Kik described Kin as an opportunity for both Kik and early Kin investors to “make a ton of money”.
V. Kik was a loss-making business and senior management saw an ICO as their only option.
The case will now be pursued in open court, where the SEC will seek final judgement on the action (implying a hefty fine) to be taken.
Do Kik have a chance here?
Based on the evidence currently provided by each side, it looks as though Kik hasn’t got a chance. So why did they take the case public instead of just pay an undisclosed fine privately? According to the CEO, Kik are sufficiently resourced to fight this in court and doing so will bring some much-needed clarity. Win or lose, the Kik case is sure to bring some much-needed attention to the boundaries of security regulation within today's digital age.
The comprehensive report from the SEC provides businesses details on where Kik went wrong with their ICO. While we can’t change the past, we can build the future. The continuation of a (regulated) blockchain based financing model such as initial coin offerings is good for the space. The public battle of SEC Vs. Kik gives us a chance to see the way the SEC is thinking. The cards are on the table.