The United States’ Securities and Exchange Commission (SEC) has officially charged Kik over its 2017 initial coin offering (ICO). In its filing, the SEC claims Kik violated sold Kin tokens to US investors without registering the token as a security.
Last week, Kik and the Kin Foundation launched a $5 million fund in light of the companies’ recent trouble with the SEC. Ted Livingston, the founder of Kik and Kin, said that though he’s confident the two organizations will win the case, losing the fight would be disastrous for the entire crypto industry.
“The part that has become more and more consuming is the regulation and the lack of clarity when it comes to regulation.”
– Ted Livingston, Kik
Kin cryptocurrency has been earned by over one million people and spent by over 300,000 people in the last month, Livingston stated. But despite the growing presence of cryptocurrencies in recent years, he said the organizations behind them are beginning to spend more energy on creating for the regulator, rather than the consumer. The SEC requires offerings to be registered, and is seeking a permanent injunction, disgorgement plus interest, and a penalty for Kik.
“We, like many others, think cryptocurrencies are the next megatrend in technology,” Livingston said. “[Cryptocurrencies] will create new forms of money, new open financial systems, in really new ways of organizing on a societal level. The part that has become more and more consuming is the regulation and the lack of clarity when it comes to regulation.”
The SEC just filed a lawsuit against Kik for our 2017 sale of Kin https://t.co/rNxDkbdpVL We are finally on the path to getting the clarity our industry so desperately needs. We are excited to take on the SEC in court, and are confident we will win. It is time to #defendcrypto
— Ted Livingston (@ted_livingston) June 4, 2019
Like the United States, Canada has been slow to create a regulatory framework for cryptocurrencies. Canada also does not have a federal body that regulates securities like the SEC does. Livingston said that could change if Kik and Kin are successful in their case. He argued that if the United States deems crypto to be a currency, rather than a security, it is likely Canada will follow suit.
“This is going to be a precedent-setting case for the entire industry,” he said. “If, as a hypothetical, we were to lose this case, it would be disastrous for the cryptocurrency industry.”
A legal expert active in Canada’s crypto community told BetaKit that Livingston’s assessment of this case being disastrous should Kik and Kin lose is likely an “overly fatalistic sentiment.”
Christian Lassonde, founder and managing partner at Impression Ventures, which invests in the FinTech sector, agreed, arguing that Kik and Kin are likely just trying to draw publicity to the case. Regulators are not charged with taking a particular stance on innovation, he stated, rather they are charged to enforce rules that exist to protect the public interest. Lassonde also argued that Kik broke the SEC’s rules and is simply now facing the consequences.
“The SEC is not coming after anyone because they are anti-innovation,” Lassonde told BetaKit. “Their role is not to take a particular stance on innovation, it’s to create enforce rules that exist for a very good reason, which is to protect the public interest.”
Initial coin offering draws SEC attention
Kin cryptocurrency was officially launched May 2017 by Kik. In August 2017, Kik stated plans to raise $157 million CAD through an initial coin offering (ICO), the cryptocurrency space’s rough equivalent to an IPO. In September 2017, the SEC sent Kik its first inquiry, and later a subpoena in January 2018. This subpoena was followed by eight more over the first half of 2018 and 10 testimonies.
In November 2018, the Division of Enforcement for the SEC indicated that it was considering recommending that the SEC bring an enforcement action against Kik and the Kin Foundation. It did this through what it calls a ‘Wells notice,’ a letter that is issued at the conclusion of an SEC Investigation notifying the people or firm in question that they should be charged with violation of the securities laws. Tuesday, the SEC officially filed its suit. In its filing, the SEC claims Kik violated Section 5 of the Securities Act of 1933, which requires offerings to be registered.
“Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
– Steven Peikin, SEC
The SEC also said that, in 2017, the company sought to pivot to a new type of business, which it funded through the sale of one trillion digital tokens, and that Kik marketed the Kin tokens as an investment opportunity. The SEC’s complaint alleges that Kin tokens traded at a discount price to wealthy purchasers, about half of the value that public investors paid in the offering. Kin offering involved securities transactions, the SEC said, and Kik was required to comply with the registration requirements of the U.S. securities laws.
“Kik allegedly 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,” the SEC said in its most recent filing.
“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,” said Steven Peikin, co-director of the SEC’s Division of Enforcement. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
Kik and the Kin Foundation issued a Wells response to the SEC and made it available for the public to read. In the 37-page document, the company claims Kin was designed, marketed, and offered as a currency to be used as “a medium of exchange within a new digital economy.” This, the company said, would take Kin outside the statutory definition of a “security” under the federal securities laws.
“Kik marketed Kin, not as an investment opportunity, but rather as a way to participate in a fundamentally new way for consumers to access digital products and services, and for innovative developers, and their users, to be compensated for the value they provide,” Kin and Kik stated in the Wells response.
In the past, the SEC has ruled on cryptocurrencies stating that as long as the currency is decentralized it is not a security. William Hinman, head of the Division of Corporation Finance at the SEC, has previously stated that Bitcoin and Ethereum are not securities because they are decentralized, meaning there is no third party playing a determining role in the businesses or purchasers who expect returns on their investment.
Speaking with BetaKit earlier this week, Livingston said that he considers Kin to be decentralized but the crypto would likely face intense scrutiny from the SEC when determining whether it’s sufficiently decentralized or an investment opportunity (i.e. securities).
“We are very confident that if a case were to be authorized, that we would win,” he said. “To us, the facts are very clear. That’s why we published them. The SEC doesn’t get to determine what’s a security and what’s not, the courts do that.”