On Tuesday, the U.S. Securities and Exchange Commission (SEC) sued Kik Interactive, Inc., the company which owns and operates its messenger platform, Kik Messenger, over its 2017 initial coin offering which raised close to $100 million.
According to Bloomberg, the SEC believes that Kik’s tokens at issue, ‘KIN,’ are securities under the Securities Act of 1933, and thus should have been immediately registered with the agency prior to any offering to investors.
This isn’t the first sign of trouble the messaging app has faced, encountering much speculation and hardship over the years due to its user base. At one time, Kik was a major messaging mobile application in the U.S., particularly among children, teenagers, and college students. However, over the years, the application has become the nesting grounds for child predators and criminal activity, according to reports.
The SEC has alleged that it is because of these incidents, which have caused a major decline in revenue, that the company wanted to use its initial coin offering, or ICO, has its saving grace.
In its Complaint, the SEC alleges that from May to September 2017, Kik offered and sold one trillion digital tokens called “Kin.”
More than 10,000 investors worldwide purchased Kin for approximately $100 million in U.S. dollars and digital assets—with over half of the sum coming from investors located in the U.S.
However, according to the SEC, Kik’s offer and sale of Kin was not registered with the SEC, and investors did not receive the disclosures required by the Securities Act of 1933.
In its suit against Kik, the SEC claims that the messaging platform violated Section 5(a) of the Securities Act:
“…unless a registration statement is in effect as to a security or an exemption from registration applies, it is unlawful for any person, directly or indirectly, to sell securities in interstate commerce.”
Section 5(c) provides a similar prohibition against such offers, which the SEC has also included in its Complaint.
What’s the Legal?
With respect to securities law, Congress enacted the Securities Act of 1933 to regulate the offer and sale of securities.
This Act differs from the traditional aspects of commerce, primarily operating in the areas of caveat emptor (buyer beware), in that Congress expects a regime of full and fair disclosure, requiring those who offer and sell securities to the investing public to provide sufficient, accurate information to allow investors to make informed decisions before they invest. This information is provided usually in the form of a registration statement, providing the necessary financial and managerial information about the issuer of the securities.
The issue with respect to digital currency and token offerings, at least right now, is what the meaning of a “security” means in today’s digital age.
Traditionally speaking, the definition of a security includes a wide range of investment vehicles, including stocks, bonds, and “investment contracts.”
The Howey Test has long been used as the standard to determine whether a token is in fact an “investment contract,” where an individual invests money in a common enterprise and reasonably expects profits to be derived from the entrepreneurial or managerial efforts of others.
The U.S. Supreme Court has previously held that “investment contracts” include, but are not limited to—interests in orange groves (Howey), animal breeding programs, railroads, airplanes, mobile phones, and enterprises existing only on the Internet.
With respect to Kik and its messenger platform, Kik Messenger, the questions to be answered center around whether its tokens, “KIN,” are:
- Considered to be securities under the Howey test, and
- If so, did Kik violate the 1933 Securities Act by failing to register its security token offering back from 2017?
If there’s anything to know here, it’s that Kik is welcoming the lawsuit with open arms, with its own plans to countersue the SEC through money it intends to raise through its own fund called, Defend Crypto. The fund was recently set up to raise money for its legal defense, having already raised close to $5 million in donations from supporters as of the time of this publication.
Kik’s CEO, Ted Livingston, told The Wall Street Journal, that this lawsuit only provides “the clarity [the industry] so desperately needs.”
The heart of this issue, as it is with the majority of enforcement actions the SEC is bringing against companies with unregistered securities, is whether the Howey Test is really applicable in this scenario. Most likely, yes. Under Howey, tokens must meet three prongs in order to be deemed a “security,” rather than a commodity, which is not required to be registered with the agency.
Since the SEC’s announcement in the past 24 hours, the value of Kin has plummeted by over 30 percent.
At the end of the day, this serves to be the SEC’s first contested enforcement action for a pure regulatory violation. If the SEC is correct in its allegations, this could force Kik to disgorge its profits, with interest, back to investors and of course, face some serious penalties.
Grit Daily will be keeping you updated with this lawsuit. For more information, you can look this case up in the PACER system under
Case: U.S. SECURITIES AND EXCHANGE COMMISSION vs. KIK INTERACTIVE INC
Case No. 19-cv-5244.