SEC lawsuit accuses Kik of conducting illegal $100M ICO

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Before the company ran out of money in 2017, the executives at Kik Interactive made a call to pivot to a new type of business. That business involved selling 1 trillion of Kin, which the Ontario-based social media startup described as “currency for the digital world.” Kin raised some $98 million despite a lack of participation in Canada, and now securities regulators in the United States are after the company.

On Tuesday, the U.S. Securities and Exchange Commission (SEC) filed a complaint accusing Kik of “conducting an illegal $100 million securities offering of digital tokens” to investors in the United States “without registering their offer and sale as required by the U.S. securities laws.”

In its lawsuit, the SEC claimed Kik marketed the tokens as “an investment opportunity,” promising investors that rising demand—spurred by Kik’s “crucial work”—will drive up Kin’s value. That work involves incorporating the tokens into Kik’s messaging app as well as creating a new transaction service and build a system that will reward companies that support the token. Kik also promised to trade the tokens on secondary markets, allowing both the company and investors to profit from the increased demand.

Kik, which had yet to develop the services and systems it promised at the time of the ICO, allegedly sold Kin to public, “and at a discounted price to wealthy purchasers,” and raised more than $55 million from U.S. investors alone, the SEC noted. Currently, the tokens are allegedly trading at half of the value the public investors paid for during the token sale.

“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. 

The SEC’s move didn’t come as a surprise; Kik, after all, has been gearing up for a legal battle with the U.S. regulator and has even launched a crowdfunding page to boost its war chest.

Kik’s situation will prove to be one of the most important cases to follow. On one hand we have Kik and its CEO Ted Livingston, who believes that the SEC’s interpretation of the 1934 Securities Exchange Act is entirely wrong. On the other hand, the U.S. regulator believes the Kin ICO involves securities transactions, which means Kik has to comply with the registration requirements in the United States.

But as Dr. Craig Wright, who is also a researcher in the Leicester University’s legal facility and a member of the Society of Legal Scholars, among other credentials, points out, ICOs like Kin are nothing new. He explained: “There is an expectation of profit. Even if it was a mere utility token, it will be a securitized asset. So they are just doing old scams in new bottles. ICOs are not new. Not even close.”