The Canada-based company launched its Kin digital tokens in 2017 near the height of the cryptocurrency boom, pulling in about $55 million from U.S. investors alone, according to the SEC’s complaint. The problem, the agency says, is that while it pitched the tokens as an investment opportunity that could make buyers money in the future, it never registered them under securities laws.
“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, co-director of the SEC’s Division of Enforcement, in a statement. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
In a statement, Kik said it intends to fight the allegations, which general counsel Eileen Lyon said are based on a “flawed legal theory” about what constitutes a security.
“”We have been expecting this for quite some time, and we welcome the
opportunity to fight for the future of crypto in the United States,” said Kik CEO Ted Livingston. “We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps.”
Kik’s ICO is among the highest-profile digital token launches alleged to have run afoul of securities rules. Regulators and companies in the cryptocurrency space have sparred over how digital coins and tokens should be governed under securities, money transfer, and tax laws designed with more traditional transactions in mind.
According to the SEC’s complaint in the case, Kik launched the ICO in an effort to pivot the company after years of losses and declining use of its flagship messaging app. Executives realized they might face regulatory scrutiny over the ICO and as a result, the SEC alleges, Kik developed digital stickers—some featuring a cartoon honey badger—that could be shared by app users who bought the tokens. In reality, they were developed only as a “minimum viable product” to argue that the tokens had use beyond investing, according to the complaint.
“Basically it doesn’t really matter,” one employee allegedly wrote in a 2017 email. “The whole point is to make our legal department happy, not the users (who are actually investors and probably could care less that they got a sticker pack for their $10K investment into KIN).”
The company called the SEC’s description of the ICO misleading.
“The SEC’s complaint against Kik also presents a highly selective and grossly
misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token
distribution event,” said Livingston. “We look forward to presenting the full story in court.”
The digital tokens are now trading for about half the value members of the public first paid for them, according to the SEC.
This story has been updated with statements from Kik.