In a devastating ruling, a federal judge handed down a summary judgement finding that Kik’s $100 million initial coin offering in 2017 was an unregistered and illegal securities offering.
The decision by Judge Alvin Hellerstein of the federal district court for the Southern District of New York is not just a loss for the instant messaging-turned-Kin blockchain development firm. It means Kik Interactive CEO Ted Livingston won’t even get his day in court to argue that the Securities and Exchange Commission was wrong in labeling the 2017 ICO a securities sale.
In response to the Sept. 30 ruling, Livingston commented:
“We are obviously disappointed in this ruling. We are considering all of our options, including filing an appeal.”
The ruling comes hot on the heels of Telegram’s decision to drop its attempt to fight a similar SEC suit that prevented the small number of original investors from reselling TON tokens to the general public. Telegram returned the remaining 72% of the proceeds of the $1.7 billion sale to investors to settle the suit.
The Kik ruling does not specify any relief, but the SEC is seeking a permanent injunction, civil penalties and disgorgement—a return of funds to the initial kin token buyers. Livingston was defiant, saying:
“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 consumers.”
Kik: We respected the law
Livingston claims that Kik always supported the SEC’s goal of investor protection and takes regulatory compliance seriously. For this reason, he explained that the firm “retained sophisticated counsel (both in the United States and internationally) to analyze the law” before its ICO. After considering all the rules involved, he notes the firm is still convinced it complied with all the regulations:
“We continue to believe that the public sale of Kin was that of a functional currency and not a sale of securities.”
Judge Hellerstein disagreed. He found that the Kin offering failed the Howey test, which defines a securities offering as an investment contract in which three elements are met: There is “(1) an investment of money (2) in a common enterprise (3) with profits to be derived solely from the efforts of others.”
Notably, it adds that “form should be disregarded for substance and the emphasis should be on economic reality.”
Selling the Kin tokens covered the investment of money. As for a common enterprise, Judge Hellerstein found that by releasing a fixed number of Kin tokens, the “success of the ecosystem drove demand for Kin and thus dictated investors’ profits. Kik recognized and repeatedly emphasized this.”
Kik, the judge explained, “pooled proceeds from its sales of Kin in an effort to create an infrastructure for Kin, and thus boost the value of the investment. This is the nature of a common enterprise… to increase the range of goods and services that holders of Kin would find beneficial to buy and sell with Kin.”
The expectation of profits derived solely from the efforts of others was met by Kik’s CEO promoting Kin and extolling its profit-making potential, Judge Hellerstein said. He cited Livingston telling potential investors that because “Kik was offering only a limited supply of Kin, so as demand increased, the value of Kin would increase, and early purchasers would have the opportunity to earn a profit.”
SEC’s failure to regulate
Kik Interactive’s general counsel Eileen Lyon raised concern that “the ruling may raise more questions than it answers.” She also explained that she believes the SEC should change its conduct as its current course is not the proper one:
“The SEC should engage in proper rulemaking, including the opportunity for public commentary, rather than force our industry to hunt for regulatory clues among the SEC’s conflicting statements, Commissioner and staff speeches, no-action letters, closed-door meetings with the SEC, and nonprecedential settlements.”
The legal expenses of the SEC lawsuit proved to be way too hefty for the U.S. messaging app’s firm. As Modern Consensus reported about one year ago, at the time Kik laid off 100 of its employees in a bid to keep the company afloat, although it soon reversed that.
Updated Oct. 1 at 3:50 p.m. to add to front page excerpt.