Kik Interactive responded angrily yesterday to a lawsuit by the U.S. Securities and Exchange Commission alleging its $100 million initial coin offering of the Kin cryptocurrency was illegal. The case is the SEC’s highest-profile action to date claiming that an ICO violated the law by selling an unregistered security to the public.
The agency sought to “twist the facts by removing quotes from their context and misrepresenting the documents and testimony” it had gathered during its investigation,” Kik’s attorneys said in the August 6 filing.
They added that the SEC suit “badly mischaracterizes” the facts, suggesting that it was an attempt to gain media attention.
At its core, Kik’s response takes the position that the Kin offering was not a full securities offering as defined by the U.S. Supreme Court’s “Howey Test.” The Kik filing claims it was two offerings, one a private sale to accredited investors that was exempt from Howey under Regulation D.
in May, Kik launched a $5 million fundraising campaign for an organization, Defend Crypto, to support its lawsuit to overturn the SEC’s position. In late June, Kik separated out the $5 million it had donated to defend the suit and placed the $2 million in donated funds—including another $500,000 it kicked in—under the control of the Blockchain Association to support “other projects fighting for the future of crypto,” Kik adviser Tanner Philip wrote in a Medium post.
Twisting the facts?
The SEC noted that Kik’s ICO happened nearly two months after the agency’s DAO Report. That classified almost all ICOs to be securities offerings. Launching one is a very burdensome, time consuming, and expensive process.
The agency’s lawsuit pointed out that Kik knew this and proceeded anyway. The SEC quoted a consultant warning the company that a multi-million dollar Kin offering pitched to retail buyers “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.’”
The Kik filing disputes that allegation, claiming that “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.’”
It added: “In other words, the consultant said the opposite of what the Commission claims he said.”
Why launch an ICO?
The SEC’s June 4 lawsuit claimed the ICO was a “Hail Mary pass” to revive a failing online messaging service by reinventing it as an Ethereum ecosystem called Kin.
In July, Alex Frenkel, general manager of the Kin Ecosystem, told Modern Consensus a very different story.
Frenkel asserted at the time of the Kin ICO that Kik was “a mainstream company with hundreds of millions of users, a very strong brand, and major investors including Union Square Ventures and Tencent. The company reached a $1 billion valuation in its last round and was the biggest brand to do an ICO before Telegram.”
The problem, he said, was that its high profile, “caused a lot of attention. I think the SEC found themselves in a very challenging situation with many ICOs being terrible frauds and had to do something. Initially they went after the scammy ones and tried to close them down, and then they tried to settle with other projects where it was clear that the token was not used by anyone, and they got a few settlements, and I think they wanted a similar settlement with Kik.”