On October 21, 2020, the U.S. Securities and Exchange Commission (“SEC”) announced that a federal district court has entered a final judgment on consent against Kik Interactive Inc. (“Kik“) to resolve the SEC’s charges that Kik’s unregistered offering of digital “Kin” tokens in 2017 violated the federal securities laws. On the legal grounds of this final judgment, the court approved a settlement between Canadian Kik and SEC. Under the settlement, Kik will pay a US$5 million penalty. This settlement resolves all ongoing matters between Kik and the SEC.
The SEC Complaint
The SEC’s complaint, filed on June 4, 2019, alleged that Kik sold digital asset securities to U.S. investors without registering their offer and sale as required by the U.S. securities laws. Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors, the SEC found.
The court granted the SEC’s motion for summary judgment on September 30, 2020, finding that undisputed facts established that Kik’s sales of “Kin” tokens were sales of investment contracts, and therefore of securities and that Kik violated the federal securities laws when it conducted an unregistered offering of securities that did not qualify for any exemption from registration requirements.
The final judgment permanently enjoins Kik from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. Kik is further required, for the next three years, to provide notice to the Commission before engaging in enumerated future issuances, offers, sales, and transfers of digital assets. Kik will also pay a $5 million penalty.
Issuers seeking to use the public markets to capitalize their businesses may not evade the registration requirements of the federal securities laws. The court’s decision recognized that Kik was engaged in a single, illegal offering of securities.”Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit.
On the basis of this court decision, a settlement between the SEC and KIK was found. But they would have been prepared to appeal against the ruling, says KIK.
This has been a long, expensive, and public battle between Kik and the SEC. Although we respectfully disagree with Judge Hellerstein’s analysis in his ruling and were prepared to pursue an appeal, the SEC offered settlement terms that allow us to put this behind us and focus on our mission.Kik Interactive Inc.
The crypto hype
In the crypto hype of 2017 and 2018, ICOs were considered the new form of financing for projects and companies. Worldwide, tens of billions of dollars were raised from investors by issuing new cryptocurrencies through ICOs. On CoinMarketCap almost 7,500 different cryptocurrencies are listed as a result of the ICOs and other forms of token placement.
The vast majority of these ICOs and their tokens or coins are either fraud, scams, or junk. The regulators were initially overwhelmed by the ICO tsunami and did not begin to regulate or to file lawsuits and complaints until 2018.
SEC’s position confirmed
The SEC has consistently taken the legal view that Initial Coin Offerings (“ICOs”) and other forms of public placements of cryptocurrencies (coins or token) are subject to the U.S. Securities Act and qualify as an issue of securities. Therefore, issuers in the U.S. would have to register their ICOs with the SEC. The new Court Order in the Kik case confirms this legal view.