Kik Interactive has responded to the Security and Exchange Commission’s (SEC) enforcement action alleging the sales of unregistered securities. The legal fisticuffs are being intently followed by the crypto industry and any decision may impact the entire US digital asset industry.
Earlier this year, a pending enforcement action became public regarding Kik’s $100 million initial coin offering (ICO) completed in 2017 during the height of the crypto bubble. Kik quickly expressed its intent to defend itself against the SEC and argue its case. A good synopsis of the debate is available here.
Kik initially responded to the SEC through a “Wells Submission” explaining why the SEC should not file an enforcement action against it. The initial defense was deemed insufficient and the SEC Enforcement Division went public with their complaint in June.
At that time, Steven Peikin, Co-Director of the SEC’s Division of Enforcement, stated:
“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. Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
Former Chief of the Enforcement Division’s Cyber Unit Robert A. Cohen, added:
“Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
Today, we have Kiks extensive response as to why the SEC is wrong. Kik is demanding trial by jury in pursuit of a decision.
To quote the “Answer to Complaint.”
“the Commission’s Complaint reflects a consistent effort to twist the facts by removing quotes from their context and misrepresenting the documents and testimony that the Commission gathered in its investigation. The result is a Complaint that badly mischaracterizes the totality of the facts and circumstances leading up to Kik’s sale of Kin in 2017. These tactics may have gotten the Commission a decent news cycle, but they will not withstand meaningful scrutiny at summary judgment or trial.”
The 131-page long rebuttal starts with three highlighted instances where the SEC allegedly erred in its investigation. For example, the Answer to Complaint explains:
“The [SEC] complaint alleges …”
“Even prior to the DAO Report, however, Kik had been informed by one of its consultants that the Kin offering was, potentially, an offering of securities that needed to be registered with the SEC and that ‘unregistered public securities offerings are not legal in the U.S.’”
But the Commission omits the full quote from the consultant, in which the consultant distinguishes digital currencies, such as Kin, from securities:
“[U]nregistered public securities offerings are not legal in the U.S. In the case of a community currency, there is a good basis to argue that this is not a security. You’re just selling units of property that you created that are used for a particular purpose in your app.”
In other words, the consultant said the opposite of what the Commission claims he said in its Complaint.
Kik states that the selectivity and misleading statements by the SEC are indicative of the weakness of the claim. Kik says the Commission has failed in its duty to “seek justice first” and the evidence in the case is dramatically different than what the enforcement division portrays.
Crowdfund Insider contacted securities attorney and blockchain specialist Lewis Cohen for his perspective regarding Kik’s Answer to Complaint.” Cohen, founder of DLX Law – a law firm that recently received a No Action Letter from the SEC for the issuance of tokens by Pocketful of Quarters, said part of Kik’s defense comes down to a lack of regulatory clarity at the time of the Kik ICO.
In the document, Kik points to the Due Process Clause of the United States Constitution that demands clarity in rule of law. Basically, Kik is arguing that the SEC fails in its argument because it was late to the game in clarifying what can or cannot be done. If there aren’t clear cut rules established how can an issuer know where the law applies?
Quoting the Supreme Court, Kik states:
“Vague laws may trap the innocent by not providing fair warning. Second, if arbitrary and discriminatory enforcement is to be prevented, laws must provide explicit standards for those who apply them.”
But even if regulatory ambiguity was present, Cohen believes that Kik still had the option to engage with SEC staff.
“In looking at Kik’s first and primary affirmative defense regarding “due process”, it is critical to recall that Kik had the opportunity, as other issuers took at that same juncture, to engage with the staff of the SEC and request a no-action letter for their public token sale. Looking back, at the time Kik was considering undertaking their public sale, would it have been reasonable to conclude that the no-action process would likely be very time-consuming? Absolutely! (And, indeed, for companies that went down the path of requesting no action relief, like Pocketful of Quarters, it did turn out to be very time consuming.),” explained Cohen. “However, in my view, the fact that we now have two no action positions for issuers that engaged with the Commission cuts directly against the “due process” argument that Kik had no way of figuring out what the chief enforcement agency for securities law in the United States thought the law was.”
The Kik lawsuit has spawned a “Defend Crypto” fund which is now managed by the Blockchain Association. Approximately $2 million in crypto has been raised to aid in Kik’s defense and pursue of a jury trial. Of course, following the $100 million ICO – Kik should have plenty of money to defend itself in what will most likely be a protracted legal battle.
SEC v Kik Interactive Anser to Complaint 8.6.19 Case 1:19-cv-05244-AKH
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