Kik Interactive is being sued by the US Securities and Exchange Commission over its 2017 initial coin offering that raised $100 million in what the agency says is unregistered securities. $55 million was raised from US investors, according to the SEC statement released this week, which alleges that the one trillion tokens sold count as a security and therefore, should have been registered with the government.
The SEC uses the “Howey Test” to see whether an ICO counts as a security: if the token’s value is in the control of a small amount of companies, it’s a security; if it’s decentralized enough, it doesn’t count.
Kik is a once-popular messaging app that managed to have 300 million registered users around the end of 2016 — but registered users isn’t the same as active users and since this time, the user base has likely declined significantly as WhatsApp and other messaging apps gain popularity.
This cryptocurrency was supposed to enable people to buy and sell digital services, but landed Kik in a bit of trouble:
Kik’s popularity with children and teens made it a breeding ground for child predators, helped by the fact that police can’t use a “phone number, first and last name (display name), or an email address … to uniquely identify a user in our system”
The report alleges that as revenue declined, Kik looked to crypto to reverse its misfortune; Kik had an ICO of one trillion Kin and raised $100 million
The SEC contacted the company for more information on the offering and sent a warning of incoming enforcement
A lawsuit is launched, with the SEC requesting “a permanent injunction, disgorgement plus interest, and a penalty”
Though Kik was once one of the popular messaging apps of choice, it’s been left behind by Facebook’s purchase of WhatsApp for $19.3 billion and Snapchat’s IPO. But Kik has been losing money the whole time, recording $2.2 million in revenue over $29.2 million in expenses from mid-2015 to mid-2016. In mid-2016 to mid-2017 the company made even less money, $1.5 million in revenue, but had higher expenses at $32.3 million.
There are several other interesting facts that arose from the lawsuit:
People who joined Kik’s simple agreement for future tokens got a discount, an investor accreditation check and received more information about the company (including a disclosure that Kik was losing users; it had 10 million in Jan. 2016, falling to 6 million in Jan. 2017)
Kik built special sticker packs for Kin holders to make it seem like there was actual use for them
The Ontario Securities Commission told Kik that its offering qualified as a security, causing the company to bar Canadians from the public sale
But what’s most interesting is Kik CEO Ted Livingston’s flip-flop stance on investors using Kin to profit off. In a 2017 video he can be seen saying “we’re gonna put [kin] inside Kik and it will become super valuable on day one, we think.” Then in an email, he said that it would allow people to “buy today, sell tomorrow, profit,” according to Bloomberg.
Now Kik is arguing in its response to the Wells notice that buyers had no expectations of profiting from purchasing tokens, meaning that its currency misses one of the requirements to be considered a security:
For example, there is no expectation of profits where purchasers are primarily led to expect an item for use or consumption, even in the future. Nor is there a reasonable expectation of profits merely because the promoter mentions that an item could increase in value or that the purchaser could profit.
As the company’s revenue declined, the SEC believes that the company wanted to use the ICO as a last-ditch attempt to save itself.
Meanwhile, Kik is launching a crowdfunding effort to battle the issue in court — a battle that will shed some much-needed light on the rules and regulations that surround cryptocurrency. These companies aren’t necessarily trying to avoid legal due diligence, but it’s difficult for them to do so when there isn’t a set of clear laws.