US court agrees with SEC that Kik's $100 million coin offering violated the law

Kik violated securities law when it sold tokens in 2017, a judge has ruled.

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A US district judge for the Southern District of New York has agreed with the Securities and Exchange Commission’s assessment that Kik’s $100 million initial coin offering (ICO) in 2017 was a securities sale. Judge Alvin Hellerstein has granted SEC’s motion for summary judgment, ruling that Kik violated the Securities Act when it sold its tokens called “Kin” without the blessing of the SEC.

The commission considers tokens as securities and requires their sale to be registered. It has gone after other companies that held ICOs in the past, including Telegram, which was ordered to return over $1.2 billion to investors and to pay an $18.5 million civil penalty. The SEC also fined blockchain technology company $24 million for running an unregistered ICO.

In the ruling (PDF), the judge explained that courts rely on the three elements of the Howey test to determine what constitutes a securities sale. According to the Howey test, something is a securities sale if it’s an investment of money, in a common enterprise and has expectations of profits to be derived solely from the efforts of others. The judge wrote:

“Kik concedes that its issuance of Kin through the Token Distribution Event (TDE) involved an investment of money by which participants purchased or acquired Ether and exchanged Ether for Kin. Thus, the parties agree that the first element of the Howey test is satisfied. The parties dispute whether the second and third elements are satisfied. I hold that that they are.”

With regards to the second element, he said that Kik established a common enterprise when it deposited its investors’ money in a single bank account. Further, he said that Kik extolled Kin's profit-making potential in public statements and at public events, describing how investors can earn in a way that satisfies the third element.

In a statement, Kik CEO Ted Livingston expressed his disappointment in the ruling and declared the company’s intention to fight back:

“We are obviously disappointed in this ruling. We are considering all of our options, including filing an appeal. To be clear, Kik has always supported the Commission's goal of protecting investors, and we take compliance seriously. In preparing for the sale of Kin, Kik retained sophisticated counsel (both in the United States and internationally) to analyze the law as we understood it, and we continue to believe that the public sale of Kin was that of a functional currency and not a sale of securities. While this is a setback for Kik, this decision does not impact the Kin Foundation, the Kin token and the growing ecosystem of developers making Kin the most used cryptocurrency by mainstream consumer.”

Livingston previously said that Kik and the SEC negotiated for 18 months in an attempt to come to an agreement, but the agency ultimately decided to take the company to court unless it agrees to label Kin as a security. In order to raise money to face the SEC in court, Kik sold its messaging app business and reduced its workforce to 19, affecting 100 employees in the process. Whisper owner MediaLab now runs the Kik messaging app.

The two parties have until October 20th, 2020 to submit a joint proposed agreement for injunctive and monetary relief. They’ll have to turn in a single document noting their differences if they can’t come to an agreement.