The U.S. Securities and Exchange Commission (SEC) is alleging Kik Interactive Inc. sold millions of dollars worth of unregistered securities as part of its $100 million initial coin offering. The SEC announced a lawsuit against the company today, seeking a permanent injunction, a penalty, and disgorgement with interest.
Kik has responded in a statement, saying it expected the suit for some time and looks forward to the fight for the future of crypto.
The SEC complaint indicates Kik turned to a new type of business financed by the sale of one trillion digital tokens after it lost money on its primary product, an online messaging application. The company made the sale out of concerns it would run out of funds during 2017, the filing alleged.
In its suit, the SEC described the floundering state of Kik’s messenger business, which it says “has never been profitable.” The agency said the ICO was viewed as a “hail Mary pass” by one of its board members to breathe new life into the business by raising new capital.
The SEC also alleges that in the securities sale, Kik marketed its “Kin” token as an investment, claiming a rising demand would drive up the value of its token and that Kik itself would work to drive up the demand by including the token on its messaging platform, among other incentives. According to the suit, Kik emphasized only a finite number of tokens would be created and rising demand for the tokens would cause their value to appreciate.
The SEC also claimed that Kik “assured” potential buyers of the token that they would be able to trade Kin on secondary trading platforms and described it as “an opportunity for both Kik and early Kin investors to ‘make a ton of money.’”
Because the Kin offering allegedly promised securities transactions, claiming the token would trade on secondary markets and yield a profit for both the company and holders, the SEC claims Kik was bound by securities laws.
“Kik told investors they could expect profits from its effort to create a digital ecosystem,” said Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit in a statement. “Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
Eileen Lyon, Kik’s General Counsel argued that discussing a potential increase in the value of an asset is not necessarily equivalent to promising profits from the efforts of another, a standard of the Howey Test, which discerns if an asset is a security and therefore bound by security laws. Lyon said the SEC’s assumptions stretch the Howey test too far, and Kik does not think it will hold up in court.
However, the SEC also alleges that at the time of the sale, the infrastructure did not exist and there was nothing to purchase using the token. Since then, the token has allegedly traded at half the value public investors paid in the initial offering.