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US SEC Wins Lawsuit Against Kik’s $100 Million Unregistered ICO

On September 30, the United States District Court for the Southern District of New York issued a Memorandum Opinion and Order granting the US Securities and Exchange Commission’s motion for summary judgment against Kik Interactive Inc and its $100 million ICO.

US Judge Alvin Hellerstein ruled that tech company Kik violated securities laws by failing to register its ICO (initial coin offering) with the SEC. The judge stated that Kik’s unregistered offering of digital tokens violated section 5 of the Securities Act.

The judge said: “As detailed further herein, I hold that undisputed facts show Kik offered and sold securities without a registration statement or exemption from registration, in violation of Section 5. Therefore, the SEC’s motion for summary judgment is granted, and Kik’s motion for summary judgment is denied.”

According to Hellerstein, Kik’s “Token Distribution Event” (TDE) satisfied the Howey Test’s three requirements to be considered as securities sale.

These requirements include:

· The TDE is an investment of money.

· The investment is in a common enterprise.

· There is an expectation of profit from the work of the third party.

However, Kik CEO Ted Livingston expressed his disappointment with such ruling and said that the firm considers filing an appeal.

Livingston said:

“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.”

According to Hellerstein’s ruling, the two sides have until October 20th to “jointly submit a proposed judgment for injective and monetary relief.”

SEC War on Kik

Early July this year, during a virtual court hearing, both SEC and Kik submitted their arguments to the court for their respective motions for summary judgment. In July 2019, the SEC first filed against Kik, insisting that Kik sold the tokens to U.S investors without registering their sale and offers as required by the U.S securities laws.

But Kik, in response, promised to fight back against the SEC’s lawsuit.

Kik is a Canadian based firm with a messenger app for the same name. The company intended to create its own cryptocurrency, Kin, as a way of monetizing the usage of its app. The company sold $50 million in Kin tokens between June and September 2017 as part of a private pre-sale to 50 investors. Later in September the same year, the company conducted a public sale of Kin token during which it brought in an additional $49.2 million. However, two years later, in 2019, the SEC charged Kik with violating section 5 of the Securities Act.

Spotlight on ICOs

There have been no registered public offerings of ICOs in the United States to date. ICOs have long been regarded as unregistered securities sales by the U.S. Securities and Exchange Commission. The regulatory authority has already filed several lawsuits against various startups and firms for conducting the sale without registrations. Telegram messaging app giant, which raised about $1.7 billion during the token sale in 2018, was one of the victims of this kind of lawsuit.

Why the SEC Charged Telegram, EOS, Kik and ICORating: Are Your Cryptos Safe?

What blockchain or crypto projects could the SEC charge?

SEC could charge any unregistered ICO-related to America or US citizens

The Securities and Exchange Commission (SEC) could charge any unregistered initial coin offerings (ICO) if it is operated in the US or sold to the Americans, with no exceptions for popular companies or projects. The SEC has charged well-known entities, including Telegram, EOS, and Kik.

In January 2018, Telegram conducted an unregistered ICO and raised more than $1.7 billion, to develop its own blockchain, the Telegram Open Network, also known as the TON Blockchain. On Oct. 11, 2019, SEC charged them for unregistered ICO, and Telegram agreed to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty.

EOS’s parent company Block.One raised several billion dollars from ICO. EOS investors included a portion of US citizens, which led to the charges from the SEC against Block.One. On Sept. 30, 2019, Block.One paid $24 million in penalties for their unregistered ICO.

On June 4, 2019, the SEC charged TikTok-like mobile app Kik for an illegal $100 million ICO, in which more than $55 million were collected from US investors. Kik Interactive hit back at SEC with filing a 130-page response in the US District Court for the Southern District of New York, saying that the SEC is “twisting” the facts about its token, called Kin, and asked for an early trial date and dismissal of the complaint. Unfortunately, the SEC won the Lawsuit Against Kik’s $100 million unregistered ICO in the end.

ICO-related services or products or inappropriate behaviors that are connected to America or US citizens could also be charged

SEC has charged non-direct ICO but related to ICO projects or services or inappropriate behaviors.

On October 10, John McAfee, the founder of McAfee, LLC, and a “legend” in cryptocurrencies was charged by SEC with fraudulently touting ICOs and indicted by the Justice Department’s Tax Division for Tax Evasion. Although McAfee issued his token, the SEC charged John McAfee, not for the unregistered ICO, but “for promoting investments in ICOs to his Twitter followers without disclosing that he was paid to do so.” On Aug. 19, John McAfee announced on Twitter that he has abandoned his Ghost privacy coin project. In addition, cryptocurrency tax evasion is one of the reasons for charging as saying “hid cryptocurrency, a yacht, real estate and other properties in nominee names to evade taxes.”

On Aug. 20, 2019, the SEC charged Russian-based ICO Research and Rating Provider ICORating for failing to “disclose payments received from issuers for publicizing their digital asset securities offerings.” ICORating agreed to pay $268,998 to settle charges.

“The securities laws require promoters, including both people and entities, to disclose compensation they receive for touting investments so that potential investors are aware they are viewing a paid promotional item,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “This requirement applies regardless of whether the securities being touted are issued using traditional certificates or on the blockchain.”

Tightening regulations globally

The following day after McAfee was arrested, UK financial watchdog Financial Conduct Authority (FCA) banned crypto derivatives trading for retail investors. In China, all ICO and related activities were banned. Blockchain or crypto projects could cause loss of token investors, so it is necessary to establish more regulations. Blockchain or crypto projects are often finance-related that could impact the current monetary and financial systems. Projects could even further replace the power of money issuance which is absolute power in hands of central banks. Disclaimers and know-your-client (KYC) processes are essential to avoid indictment from US authorities.

ICO scope extension, decentralized exchange tokens could be the new ICO?

2020 is a year of the DeFi craze, especially with the surge in popularity of decentralized exchanges (DEXs). On Sept 2, UniSwap, the lead in DEXs surpassed traditional exchange giant Coinbase in trading volume. The problem with decentralized exchanges is that it takes almost no effort to create a new DEX. SushiSwap is a typical case. SushiSwap’s founder Hayden Adams has expressed his anger by saying that SushiSwap is one day’s effort by any competent developer at most. Then came the war between Uniswap and SushiSwap, SushiSwap’s drama, and SushiSwap issuing its native token. Until now, the real identity of SushiSwap’s founder under the name Chef Nomi remains unknown. The decentralized exchange craze, especially forks, is much like that of the ICO days.

DeFi is promising, it could be a new infrastructure for trade, transaction, and payment. There is no doubt that there are huge bubbles and scams in the DeFi industry. There are many concerns about whether or not the SEC will define decentralized exchange tokens as ICOs, thus as one type of securities offerings, especially after the rapid plunge of the DeFi token prices.

Kik Survives Legal Battle With the SEC, Kin Crypto to Continue Trading on Exchanges

The Kin Foundation, the non-profit organization aiming to promote and govern the Kin crypto project, disclosed that both itself and the cryptocurrency has survived the recently concluded legal dispute with US Securities and Exchange Commission (SEC) over the 2017 Kin initial coin offering (ICO).

The federal judge Alvin Hellerstein of the US District Court for the Southern District Of New York settled the legal case between Kik Interactive software development firm and the SEC. Justice Hellerstein said that Kik is “permanently restrained and enjoined” from violating Section 5 of the Securities Act.

As per the court order, Kik would have to pay a civil penalty of $5 million to the SEC within the next 30 days of the final court judgment. Besides that, Kik must give 45 days’ notice to the commission before any indirect or direct participation of a transfer, sale, offer, or issuance of any new digital asset, digital token or cryptocurrency, or any kind of ICO.

According to its blog post, Kin Foundation said that the Foundation and its Kin cryptocurrency are now out of the legal dispute. The Foundation said:

“In a nutshell, Kik is going to be OK. Beyond the monetary fine, Kik’s assets are still Kik’s property, including its remaining treasury, its Kin reserves, and all of its intellectual capital. Concurrently, the future of the Kin Foundation is not adversely affected. The SEC has not asked to register Kin as a security, and didn’t impose trading restrictions on it.”

Kik is now able to continue with its active development of the new code wallet and the open-source Kin SDK. Furthermore, the foundation stated that the SEC is not considering Kin as a security and is not in violation of securities laws therefore the token is free to trade on cryptocurrency exchanges.

The foundation said that its reserve is still active and it intends to continue growing the Kin ecosystem, seeking to hire a new executive director to join the team next month. The foundation revealed that the planned activity to migrate the token to the Solana blockchain would continue as scheduled.

The Origin of the Battlefront Between KiK and the SEC

In June 2019, the SEC filed a law enforcement action against Kik, alleging that Kik’s 2017 ICO was illegal because the firm sold tokens to US investors without registering the sale and offer as required by U.S security laws. Kik conducted an ICO in 2017 and consequently managed to raise $98 million, including $50 million in presales for Kin cryptocurrency.

Kik claimed that the ICO was for a currency and, therefore, was not subject to securities laws. However, last month, Justice Alvin Hellerstein granted a motion for summary judgment to the SEC, noting that the commission was correct in its lawsuit, saying that tech company KiK should have registered its ICO under securities laws. The judge, therefore, ruled that Kik’s unregistered token offering violated Section 5 of the Securities Act.