Regulatory Complaint – SEC charges Kik with conducting $100 million unregistered ICO

SEC charges Kik with conducting illegal ICO

The U.S. Securities and Exchange Commission (SEC) sued Kik Interactive Inc. for illegally raising $100 million through its Initial Coin Offering (ICO) in 2017. The regulator charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws. The Complaint was filed on June 4, 2019, with the Court (Case No. 19-cv-5244).

Kin token is a security the SEC claims

From May to September 2017, Kik offered and sold one trillion digital tokens called “Kin.” More than 10,000 investors worldwide purchased Kin for approximately $100 million in U.S. dollars and digital assets – over half of this sum coming from investors located in the United States. However, Kik’s offer and sale of Kin was not registered with the SEC, and investors did not receive the disclosures required by the federal securities laws.

SEC Complaint against Kik

The SEC laid out that Kik assured prospective buyers that they would be able to trade Kin on crypto exchanges, enabling conversion of Kin to either a digital asset (e.g., Bitcoin or Ether) or fiat currency (e.g., U.S. dollars). Moreover, Kik also declared that the company would share with buyers a common interest in profiting from Kin’s success.

Kik offered and sold its tokens in a private token sale to professional investment funds and wealthy investors using purchase agreements that Kik called “Simple Agreements for Future Tokens” or “SAFTs.”

Public token sale violated securities laws

From May through September 2017, Kik offered Kin to the general public and had public investors sign up for this public sale, even while the company was offering and selling discounted Kin to investment funds and other wealthy investors using its SAFTs. According to the SEC, Kik offered and sold securities from the initial May 2017 announcement of Kin through September 2017.

The SEC asks the Court to enter a final judgment to permanently restraining and enjoining Defendant Kik Interactive Inc. from to violate U.S. securities law, pay disgorgement and a civil penalty.

ICO as exit strategy for troubled business model

In its Complaint, the SEC argues that Kik actually lost money for years in its business and was about to run out of funds.

In late 2016 and early 2017, Kik faced a crisis. Fewer and fewer people were using Kik Messenger. The company expected to run out of cash to fund its operations by the end of 2017, but its revenues were insignificant, and executives had no realistic plan to increase revenues through its existing operations.

SEC Complaint against Kik

Given the depressive situation, the company decided to do an ICO, in what a board member called “a hail Mary pass,” according to the filing. The Kin token currently trades at less than a third where it did when the cryptocurrency first began trading, according to CoinMarketCap.com. The Kin lost more than 32% since the SEC issued its press release.

Crowdfunding to finance legal proceedings

As reported by FinTelegram, the Kin Foundation which is not a Defendant in the Complaint recently launched the crowdfunding campaign Defend Crypto (www.DefendCrypto.org) to raise money to finance its legal proceedings against an SEC. On the site, Kin says it has raised $4.2 million so far. The SEC actions would “set a dangerous precedent and stifle innovation.” The Kin Foundation said that it contributed an additional $5m to the campaign which would give Kik Interactive more than $9.2m budget to defent its position in the Court.

The thing is that Kik evidently worked with a loss producing business model and sort of used the ICO and crypto hype in 2017 to reinvent itself. While it’s competitors WeChat, WhatsApp, or Telegram dominated the market Kik failed to attract enough customers and generate sustainable income stream. Maybe the fight against the SEC provides Kik with a new business model as self-proclaimed crypto defender.