On June 4, 2019, the Securities and Exchange Commission (SEC) sued Canadian mobile messaging company Kik Interactive, Inc. (Kik) for allegedly conducting an unregistered securities offering in connection with the sale of digital tokens called “Kin.”
Kik offered and sold more than one trillion Kin and raised over $100 million through its initial coin offering (ICO) that took place between May and September 2017. The SEC in late 2018 sent a Wells Notice to the company alerting them that SEC staff had made a preliminary determination to file an enforcement action. Kik in response claimed, among other things, that Kin is not a security, but is rather more akin to a digital currency, such as bitcoin and ether.
Despite Kik’s response, the SEC said that through the agency’s interpretation of the Howey analysis, it has determined that the ICO constituted an offer and sale of securities. Therefore, by failing to register the offering with the agency, the SEC alleges that Kik was in violation of federal securities laws.
Steven Peikin, Co-Director of the SEC’s Division of Enforcement added that “by selling $100 million in securities without registering the offers or sales, [the SEC alleges] that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions.”
In response, Kik CEO Ted Livingston said that Kik will contest the SEC’s determination in federal court and “welcome[s] the opportunity to fight for the future of crypto in the United States.” The company also launched a crowdfunding campaign in order to fund its litigation efforts.
The results of the case could have a significant impact on the way that digital tokens are issued in the future. If Kik is ultimately successful in its defense, the court could also provide market participants with additional clarity regarding the classification of certain digital assets as securities. While it is currently unclear as to when the proceedings may get underway, we will continue to monitor developments in the case going forward.
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