U.S. District Judge Alvin Kellerstein has sided with the U.S. Securities and Exchange Commission (SEC), ruling that the Canadian technology firm Kik’s $100 million initial coin offering (ICO) violated federal securities laws.
On September 30, Judge Kellerstein responded to both parties’ requests for summary judgment, determining that Kik’s 2017 token sale meets the definition of a securities issuance according to the Howey test, as the ICO participants had a reasonable expectation of profit.
“In public statements and at public events promoting Kin, Kik extolled Kin’s profit-making potential. Kik’s CEO explained the role of supply and demand in driving the value of Kin: Kik was offering only a limited supply of Kin, so as demand increased, the value of Kin would increase.”
The judge noted the unique nature of the case, highlighting that he had no “direct precedent” to inform his determination due to the groundbreaking nature of distributed ledger technologies.
After analyzing statements from Kik’s executive’s and the firm’s business model, Judge Kellerstein likened Kik’s offering to a “common enterprise”, saying that the success of the firm’s digital ecosystem “drove demand for [Kik’s token] and thus dictated investors’ profits.”
Kellertsein’s order mandates that the SEC and Kik jointly submit a proposed judgment for injunctive and monetary relief before October 20.
The SEC brought its complaint against Kik in June 2019, arguing that the firm had violated securities laws by selling $55 million worth of KIN tokens to U.S. investors in 2017 (andthe remainder to overseas investors).
The SEC described Kik’s digital currency “pivot” as an opportunistic bid to turn its financial tides after losing money from its core messenger product for many years.
An October 30 statement from Kik asserts the firm “continue[s] to believe that the public sale of Kin was that of a functional currency and not a sale of securities.”
“While this is a setback for Kik, this decision does not impact the Kin Foundation, the Kin token, and the growing ecosystem of developers making Kin the most used cryptocurrency by mainstream consumers,” the firm added.