By
Temitope Olatunji
April 24th, 2024
The U.S. Securities and Exchange Commission is suing messenger app maker Kik for $100 million ICO for its Kin token which they think was an unregistered securities sale. The regulator appears to have built up a strong case in its initial court move.
U.S. Securities and Exchange Commission (SEC), is accusing Kik for conducting an “illegal $100 million securities offering” with a September 2017 initial coin offering (ICO) for its Kin token.
Anonymity-focused, Canada-based messaging service Kik Interactive is now being under investigation because SEC says that almost all tokens are essentially securities and the subject to well-established regulatory requirements under the law.
In the United States, the sale of securities is regulated under the Securities Act of 1933, which requires registration before offerings. SEC claims that Kik managed to sell their Kin tokens, which weren’t registered for taxation, therefore it could also be added to the list of charges.
They have also said that they believe that due to falling revenue streams for the company, Kik’s managers became desperate for quick money so decided to cash in on the cryptocurrency craze.
However, the biggest problem may lay that Kik management hasn’t offered enough transparency to the users, exposing them to personal financial risk.
“We’ve Been Expecting This”
Kik immediately responded to the SEC’s filing with its CEO, Ted Livingston, saying that they have been expecting this for quite some time. He added that they are being happy that the opportunity to fight for the future of crypto in the United States has given to them.
He said:
“We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps. Kin is being used by more people in more apps every day, and come trial, Kin may be the most widely used cryptocurrency in the world. While the SEC’s actions are a challenge to overcome, they won’t affect the use, transferability and characterization of Kin, and we expect momentum in the Kin Ecosystem to only continue to grow.”
Let’s not forget that last month, Livingston said the company had already spent $5 million engaging with the SEC. Kik then launched a $5 million “Defend Crypto” crowdfunding campaign to support a potential lawsuit.
Eileen Lyon, Kik’s General Counsel noted that SEC’s complaint against Kik is based on a “flawed legal theory”. She explained:
“Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a ‘common enterprise’; and that any contributions by a seller or promoter are necessarily the “essential” managerial or entrepreneurial efforts required to create an investment contract.
These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny.”
However, there are a few facts that cannot be overseen when speaking to the possible illegal actions. One of those is that at the time Kik decided to pursue an ICO, its expenses were running at $3 million per month. It was constantly losing money and nobody wanted to buy it.
The Kin tokens are now at half the price that they were sold for at the beginning of the ICO, so it is more than obvious that the company has failed to maintain the profitability of their investors, further exposing them to unnecessary financial risk.
Also, Kik built special e-stickers for its investors used to make it look like there was an actual use for the kin tokens at distribution. Let’s not forget the fact that Canadian regulators confirmed to Kik that their cryptocurrency would be considered security.
Because of that advice, Kik didn’t sell the tokens to the general public in Canada but also never asked SEC the same question.
Steven Peikin, co-director of the SEC’s Division of Enforcement, said that by selling $100 million in securities without registering the offers or sales, SEC alleges 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.”