The high-stakes legal battle feared by Kik, creators and backers of the kin token, has indeed materialized.
Per a June 4th filing with the United States District Court for the Southern District of New York, the U.S. Securities and Exchange Commission (SEC) is suing Kik over its 2017 initial coin offering (ICO) of kin, which raised $100 million USD. In the lawsuit, the watchdog argued that sale was an unregistered securities offering under U.S. federal law.
The suit delved deeply into Kik’s operations, as the SEC relied on its expanded discovery capabilities.
Therein, the Commission asserted many unflattering details, namely that the instant messaging play “has never been profitable;” that it had “no realistic plan to increase revenues through its existing operations” as of early 2017; and that the company decided to “pivot” to a token offering to, as one person involved said, “make a ton of money.”
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. pic.twitter.com/c4nhr9wfXh
— Palley (@stephendpalley) June 4, 2019
The move comes as a shot across the bow to Kik, the warning being that its battle with the SEC is only just beginning. The implicit guiding action of the enforcement? Registering a security offering with the Commission is the only way to launch such an asset within the reach of U.S. investor.
The Key Takeaways
Notably, the SEC has recently shown a lighter touch against other unregistered token offerings, but in each of those cases, the projects involved conducted remedial efforts in direct coordination with the watchdog.
Kik, on the other hand, has proven determined to resist the regulator. The company first sounded the alarm back in January, when its chief executive officer Ted Livingston said discussions with the Commission indicated the kin backers would be imminently sued.
At the time, Livingston was already saying Kik would fight the SEC in court if the day came. Fast forward to last week and that preparedness accelerated, as Kik launched its “Defend Crypto” crowdfunding campaign — an effort to raise millions of dollars to fund its court showdown, which some cryptoeconomy stakeholders called undue in light of the messenger’s large ICO.
Now that the showdown has arrived, it’s clear the SEC has found the behavior around Kik’s token offering to be belligerent.
Notably, Kik is a Canadian company. In their lawsuit the SEC notes the startup’s token was slotted as a security by the Ontario Securities Commission, so Kik “barred” Canadian investors from the offering, yet the company made no similar outreach to the SEC and didn’t accordingly bar U.S. investors.
Probably they thought OSC would be a softer touch and they could use that + Canadian organization of Kik as a 'shelter' of sorts from SEC. Turned out wrong; OSC said Kin were securities. But they went ahead with sale anyway, knowing SEC would surely be even tougher. pic.twitter.com/L4qHhUfllJ
— Gabriel Shapiro (@lex_node) June 4, 2019
The SEC undoubtedly feels secure in bringing the case on those grounds, as $55 million of the $100 million raised in the kin ICO was derived from U.S. investors. And because Kik didn’t file registration statements with the SEC, the watchdog said these investors were left in the dark regarding materially important information.
So what’s the fix if the Commission has its way in court? Nothing short of Kik’s full submission:
“The SEC seeks a final judgment: (a) permanently enjoining Kik from engaging in acts, practices, and courses of business alleged herein; (b) ordering Kik to disgorge its ill-gotten gains and to pay prejudgment interest thereon; and (c) imposing civil money penalties on Kik […].”
For its part, Kik has cast the now-materialized court case as an opportunity for a judge and a jury to determine if the SEC has legally overextended itself in America’s nook of the cryptoverse. But it’s doubtful whether that thrust will win the day, some legal experts have said.
Whatever ends up happening, the short-term effect of the news seems to have been chilling on the market. The majority of the cryptoeconomy’s top coins were in the red on the day amid a spate of acute sell pressure.