Kik Interactive Inc., a company based in Canada, raised about $100 million selling Kin tokens in an initial coin offering (ICO) during the midst of the hot crypto issuance market in 2017. First sold to accredited investors in a SAFT, once the platform was functional, Kik sold the tokens to anyone who asked.
Jump forward to November 2018, and Kik was on the receiving end of a Wells Notice from the US Securities and Exchange Commission (SEC).
A Wells Notice is not a good thing. It is a notification from a regulator outlining its intent to pursue an enforcement action. The proposed enforcement action alleges violations of Sections 5(a) and 5(c) of the Securities Act – the issuance of unregistered securities.
In December, Kik responded via its outside counsel (Cooley).
Crowdfund Insider covered the Wells Notice here. The topic was covered once again when it emerged that a Kik representative had allegedly promoted the ICO as an opportunity to gain as an investment. While not conclusive, it did muddy the waters.
But once you step back from the guardrails of Howey and securities laws concocted before the internet existed, then the debate becomes more esoteric. Is the current rules-based approach by the SEC a detriment to Fintech innovation?
Kik and its supporters clearly believe that is the case.
Kik has posted a “Defend Crypto” website to raise funds for a collective battle to challenge the US regulator. The page states:
“The SEC has been shaping the future of crypto behind the scenes with settlements that set a dangerous precedent and stifle innovation.
Kin is unwilling to let that happen and is setting aside $5MM with Coinbase to take them on in court.
But with the future of crypto on the line, $5MM might not be enough. That’s why we’re calling on others to contribute to the Defend Crypto fund.”
Defend Crypto is a call to arms. A battle line drawn in an us (crypto) versus them (the Feds) crusade.
Kik/Kin reports that it has already spent more than $5 million in defense of its actions. The company is committing another $5 million to continue the struggle.
“If you too are fed up with this innovation tax, we encourage you to contribute also as we take on the SEC on behalf of the future of crypto in the US. Any additional contributions will be held with Coinbase and will only be used if that $5MM isn’t enough. In that case, expenses will be disclosed, and — after a court decision is made — the Defend Crypto fund will allocate the remaining resources to other initiatives. “
So can Kik win? That’s a tough question as the SEC is attempting to apply a set of rules that have guided the commission and securities laws for several generations. The 33 and 34 Act are part of the fabric of the Commission.
But the bigger question is whether or not the rules need to change. Additionally, even if the SEC was so inclined, how far can they push their rulemaking limits without the help of Congress?
Some other jurisdictions have created bespoke rules for the digital asset sector. France has enacted the Loi Pacte that will soon enable the issuance and trading of utility tokens. Many people believe the rules must be brought up to date – otherwise, digital asset entrepreneurs may vote with their feet and seek out friendlier nations.
In the meantime, expect a protracted legal battle between Kik/Kin and its supporters and the legions of lawyers at the enforcement division.