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The Securities and Exchange Commission is suing anonymity-focused, Canada-based messaging service Kik Interactive, claiming the company’s Hail Mary pivot to raising money via a cryptocurrency sale in 2017 amounted to an illegal, unregistered securities offering, Bloomberg reported on Tuesday.
That 2017 sale was an initial coin offering (ICO), a complicated financial vehicle in which investors receive digital tokens instead of traditional stock. In most cases, ICOs involve “utility” tokens designed to be built into the functionality of a blockchain-based service, supposedly creating value in the process. The SEC’s contention is that almost all tokens (the cryptocurrencies Bitcoin and ether are the sole exemptions) are essentially securities and thus subject to well-established regulatory requirements under the law.
At the time of the ICO, Kik was seeing decreased user activity in its app and burning through cash quick—with some $26 million left in the bank at a loss rate of $3 million a month. SEC documents state that while touting its new “Kin” token as an opportunity for investors to make massive profit, Kik did not publicly disclose its troubled financial situation or “other details about Kik and the offering that Kik would have been required to include in a registration statement filed with the SEC for the offering.”
Kik raised over $100 million from the sale, of which $55 million came from U.S. investors. The SEC wrote in the documents that “Kik’s offer and sale of Kin was not registered with the SEC, and investors did not receive the disclosures required by the federal securities laws.”
The SEC alleges that Kik was fully aware that its ICO could be considered a securities offering. While the agency is not accusing the company of fraud, documents in the court filing do allege that Kik proceeded with the sale without having built any functionality into its token beyond stickers.
Ultimately, Kik pursued the ICO without first achieving a decentralized economy for Kin, and without even ensuring that investors would be able to buy goods and services with the tokens upon their receipt. Instead, Kik pursued a superficial Minimum Viable Product in the form of digital, cartoon “stickers” that would be a supposed added benefit to Kik Messenger users who purchased Kin. The stickers would appear inside Kik Messenger and would be available only to Kin buyers who also had a Kik Messenger account.
… Kik did not design the cartoon sticker to encourage people to buy Kin for noninvestment purposes, and, in any event, the stickers could not be purchased using Kin. Rather, Kik developed the stickers based on an effort to create a hypothetical “use” for the tokens, which Kik believed was relevant to whether Kik’s sales of Kin were securities transactions under the securities laws.
Specifically, stickers like this one of a honey badger holding a boombox with the caption “lets JAM”:
While Kin did later surge to a market capitalization of $987 million in January 2018, according to CNBC, it later dropped by 97 percent and now stands at around $24.5 million.
“Companies do not face a binary choice between innovation and compliance with the federal securities laws,” SEC Division of Enforcement co-director Steven Peikin told media outlets in a press release.
As the New York Times noted, the SEC has gone after ICO operators before, but the case against Kik is the largest and highest profile. Kik itself is raising some $5 million for a legal defense fund, DefendCrypto.org, which as of Tuesday evening had successfully raised slightly over $4.3 million. According to a January 2019 article in Breaker Mag, Kik CEO Ted Livingston and crew have continued to insist that Kin is a currency rather than a security.
In the suit, the SEC wrote they are seeking to have Kik “disgorge its ill-gotten gains and to pay prejudgment interest thereon,” as well as impose “civil money penalties on Kik pursuant to Section 20(d) of the Securities Act [15 U.S.C § 77t(d)].” In a statement to industry publication Coindesk, Livingston wrote that the SEC “presents a highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event. We look forward to presenting the full story in court.”