- The judge ruled that Kik’s token sale satisfied passed the Howey Test and classifieds as securities.
- Kik and SEC have till October 20th to decide how to proceed.
Judge Alvin Hellerstein of the U.S. District Court for the Southern District of New York ruled that Kik Interactive Inc. violated securities laws by failing to register its $100 million initial coin offering (ICO) with the SEC. According to the Judge, Kik’s “token distribution event” (TDE) satisfied the Howey Test’s three requirements to be deemed a securities sale. These requirements are:
- The TDE is an investment of money.
- The investment is in a common enterprise.
- There is an expectation of profit from the work of the third party/
In a 19-page ruling, the judge stated:
Kik concedes that its issuance of Kin through the TDE involved an investment of money by which participants purchased or acquired Ether and exchanged Ether for Kin. Thus, the parties agree that the first element of the Howey test is satisfied. The parties dispute whether the second and third elements are satisfied. I hold that that they are.
SEC vs. ICOs
The case was filed by the Securities and Exchange Commission (SEC) last year. The regulatory body insisted that Kik’s Kin token sale was an unregistered securities offering while the latter claimed it was not.
ICOs have long been considered as unregistered securities sales by the SEC. They have already filed multiple lawsuits against different companies and startups for doing the sale without registrations. One of the victims of this lawsuit happens to be messaging giants Telegram, who raised a staggering $1.7 billion during the token sale.
Kik CEO Ted Livingston expressed his disappointment with the ruling and revealed that the company is considering a potential appeal:
To be clear, Kik has always supported the Commission’s goal of protecting investors, and we take compliance seriously. In preparing for the sale of Kin, Kik retained sophisticated counsel (both in the United States and internationally) to analyze the law as we understood it, and we continue to believe that the public sale of Kin was that of a functional currency and not a sale of securities.
Kik general counsel Eileen Lyon took a direct aim at the SEC saying:
The ruling may raise more questions than it answers, since it applies only to our original token distribution. The SEC should engage in proper rulemaking, including the opportunity for public commentary, rather than force our industry to hunt for regulatory clues among the SEC’s conflicting statements, Commissioner and staff speeches, no-action letters, closed-door meetings with the SEC, and nonprecedential settlements.
Kik and SEC have till October 20th to decide how to proceed.
Reactions from Twitter
So, the Court rejects Kik’s argument that the Howey test is impermissibly vague because the SEC failed to issue guidance on securities related to cryptocurrencies. This is just the type of ruling that could spell doom for the 11 crypto class actions filed last spring in the SDNY. https://t.co/xFNG6XH1kW
— Andrea Tinianow (@AndreaTinianow) October 1, 2020
As I’ve been saying, retention of a large % of tokens by the issuer is the single most important factor in establishing “reasonable expectation of profits based on the efforts of others” and you cannot eliminate the securities laws just by avoiding saying the word “invest”. pic.twitter.com/mBBv7SRnQm
— _gabrielShapir0 (@lex_node) September 30, 2020
We should find out on October 20. Maybe both, maybe neither.
Sometimes the SEC wants the issuer to pay refunds to purchasers (bad for Kik), register the token as a security (bad for both), pay penalties (maybe survivable), or something else. We’ll see.https://t.co/zlKHq1Jf57
— Jake Chervinsky (@jchervinsky) October 1, 2020