Kik Interactive (Kin) Is Planning To Take The SEC To Court
RegulationBit News Today3 min read
The Canadian social media startup resolved to contest the SEC, which investigated the token sale and gave notice that it intended to pursue charges over alleged breaches of U.S. securities law. According to a post by Ted Livingston, the next step is for SEC staff to determine whether to advise the agency's commissioners to authorize legal action against Kik.
The Legal Showdown
The company believes Kin is a currency, not a security, and argues that it never marketed its ICO as an investment.
The Origins of Kik and Kin
First launched in 2009 by University of Waterloo students, Kik is a messaging application known for its anonymity and privacy features. The app has attracted hundreds of millions of downloads and investment from prominent backers such as Tencent, Union Square Ventures, Spark Capital, and RRE Ventures.
Seeking a revenue source more sustainable than standard advertising methods, Kik secured $98 million in 2017 through a Token Distribution Event, another name for an initial coin offering. The ERC-20 token, called Kin, was built on the Ethereum blockchain to serve as a standard medium of exchange for activity across Kik's platform. Kin was later incorporated into over 30 applications available on the iOS and Google app stores.
After creating 1 trillion Kin tokens, Kik raised $98 million from the sale, assigning 60% of the supply to a newly established non-profit foundation and 30% to the company's team. The remaining 10% was allocated to investors in the ICO. Prior to the public event, Kik sold $50 million worth of Kin in a presale to 50 wealthy investors, mostly blockchain hedge funds. During the public offering, Kik barred Canadian citizens from buying tokens because the Ontario Securities Commission had designated Kin as a security.
Regulatory Scrutiny and the Wells Notice
By mid-2017, the SEC had already launched an enforcement push against ICOs, issuing an investigative report concluding that tokens issued by the DAO, an Ethereum-based decentralized fund, were securities.
The SEC first got in touch with Kik two days following the launch of the token sale. Although initially friendly, the conversations ramped up over time. On November 16, 2018, the SEC sent Kik and the Kin Foundation a Wells notice, alerting them that regulators planned to bring an enforcement case over suspected securities law violations.
SEC negotiations have cost Kik $5 million, as the media startup has been trying to defend its KIN token.
Legal Arguments and Industry Implications
On December 7, Kik sent back a 31-page response to the Wells notice, saying that its ICO involves “no fraud. In a Medium post, Kik CEO Ted Livingston laid out why he disagrees with the SEC's claims.
Kik stated that promoting the offering as an investment would have ruined the project, as Kin could only succeed if users employed it as a transactional currency. Instead, Kik promoted Kin as a way for consumers to access digital products and services, and for developers and their users to earn compensation for the value they provide.
A judge concluded that the SEC had not supplied enough evidence to prove Blockvest broke the law, indicating that Kik might also prevail if it challenges the regulator in court.
Because token sales have declined partly due to the prospect of regulatory penalties, the ultimate outcome of the dispute could have a substantial impact on the cryptocurrency sector.
