In late 2018, the Securities and Exchange Commission (SEC) sent a Wells Notice to Kik Interactive Inc. and the Kin Ecosystem Foundation (together, the “Respondents”) providing that SEC staff had made a preliminary determination to recommend that the SEC file an enforcement action against them for alleged violations of Sections 5(a) and 5(c) of the Securities Act in connection with the issuance and sale of a digital currency, Kin. In sending this Wells Notice, the Respondents were given the opportunity to make a Wells Submission, which allows them to present facts and legal arguments to convince the SEC that no such enforcement action should be brought. In a somewhat unusual move, the Respondents published their Wells Submission on the company’s website, indicating that they would fight the proposed enforcement action.
In their Wells Submission, the Respondents provide a detailed history of Kin and argue that the issuance and sale of Kin did not run afoul of U.S. federal securities laws because Kin is not a “security” and the issuance and sale of Kin did not constitute offers or sales of “investment contracts,” as detailed in the seminal investment contract analysis in SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946) (the “Howey Test”). The Respondents argue that Kin is more akin to a currency, in the vein of bitcoin and ether, which the SEC has previously indicated are unlikely to be classified as securities. They also do not believe that the issuance and sale of Kin constitutes “an investment in a common venture premised on a reasonable expectation of profit to be derived from the entrepreneurial or managerial efforts of others” because there is no common enterprise between the Respondents and the recipients of Kin, and also because Kin purchasers were not led to expect profits from the efforts of others.
In any event, the Respondents believe that an enforcement action is unwarranted because, even if the SEC does not agree with their analysis, the Respondents acted in good faith by retaining relevant counsel, conducting KYC, AML and OFAC screening and taking proper precautions with respect to the manner in which they issued and sold Kin, and that any enforcement action would only serve to harm holders of Kin. That they purposefully reviewed relevant jurisdictions and chose not to proceed in Canada, China and certain individual states within the U.S. due to regulatory uncertainty is, according to the Respondents, evidence of their intent to act within all applicable laws and regulations.
It is unclear how the SEC will respond. If the SEC ultimately brings an enforcement action, market participants could have greater clarity concerning the potential classification of digital assets as securities. However, an enforcement action could also impact the manner in which digital assets are developed and marketed in the U.S., as those same market participants may also see the SEC’s invocation of the Howey Test to be a barrier to innovation given the necessarily fact-specific manner in which it must be applied. We will continue to monitor developments in respect of Kin and provide an update once the SEC has responded.
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