The Securities and Exchange Commission (SEC) has publicly announced its lawsuit against Kik Interactive for conducting an illegal $100 million securities offering of “Kin” digital tokens in an initial coin offering (ICO). The legal action should come as no surprise to industry followers as Kik was the target of a Wells Notice, a document indicating an SEC investigation, at the end of 2018. Kik raised approximately $100 million during the height of the ICO boom allegedly selling to both accredited and non-accredited investors.
The SEC has charged Kik that it sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.
The ICO commenced weeks after the line in the sand DAO Report issued by the SEC. The Commission has consistently pursued ICO issuers that launched an offering post-DAO Report.
The SEC states:
“Kik had lost money for years on its sole product, an online messaging application, and the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens. Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors.”
The SEC notes that Kin tokens traded recently at about half of the value that public investors paid in the offering and alleges that Kik marketed the Kin tokens as an investment opportunity.
At the time Kik offered and sold the tokens, the SEC alleges the services did not exist and there was nothing to purchase using Kin.
The SEC’s complaint alleges the Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws.
Kik, based in Canada, apparently contacted the Ontario Securities Commission (OSC) to discuss the offering. According to the SEC complaint:
“OSC staff definitively communicated [to Kik’s outside counsel] a position that the [sale to the public of Kin] constituted an offering of securities.” After learning of the OSC’s position, Kik barred Canadians from purchasing Kin in the public sale.”
The complaint states that Kik “did not make a similar overture with the SEC.”
It has been widely reported that a Kik representative was documented in a video promoting the investment characteristics of the ICO.
In recent days, Kik has launched a “DefendCrypto” fund seeking to garner industry support for Kik to challenge the SEC and its allegations. The Fund has raised approximately $4.2 million to date.
“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, reaffirmed that Kik told investors they could expect to profit from participating in the offering:
“Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
The SEC has previously charged other ICO issuers with selling unregistered securities. So far, the SEC has settled ICO cases with Munchee Inc., Gladius Network LLC, Paragon Coin Inc. and CarrierEQ Inc. d/b/a Airfox.
SEC v. Kik Interactive comp-pr2019-87