SEC wins landmark case against Kik

A US district court judge grants the SEC’s motion for summary judgment

Image of Kik messenger app on a laptop
The company was charged for violating Section 5 of the Securities Act

The US Securities and Exchange Commission (SEC) just won a historic lawsuit against Kik Interactive, where the SEC alleged that Kin digital tokens were in violation of the Federal Securities Act.

The ruling, which was carried out by US District Court Judge Alvin Hellerstein, was made more than six months after the two sides filed motions for summary judgment, with the intention to bring the court case to an end without a trial. Now, the civil case is one step closer to granting penalties, an inevitable conclusion to the legal affair.

Kik is a company based in canada with a messenger app that has the same name. The company was working on the development of its own cryptocurrency, the Kin, as a way of monetising app usage.

From June to September 2017, Kik sold $50 million in Kin tokens as part of a private pre-sale to 50 investors. A part of this “Simple Agreement for Future Tokens” (SAFT) had investors understand that they were purchasing these tokens at a discount, and they explicitly agreed that they were buying a security.

By September, Kik held a public sale of the token, where it managed to rake in an additional $49.2 million.

When Kin was announced, the SEC did not yet have rules regarding the governance of cryptocurrencies such as Kin. The agency’s DAO Report, which established a rough set of guidelines for when token offerings could be considered as securities, came out in July 2017 — just as Kik was putting its sale into motion.

Two years later, the SEC charged the Canadian company with violating Section 5 of the Securities Act, for offering and selling securities in the country without being registered to do so.

While the judge noted that he did not have judicial precedent guiding him in this matter, he agreed with the charges. The core of the case revolved around whether the sale satisfied the Howey Test, a nearly hundred-year-old measure for identifying a security.

It stipulates that the security must be an investment of money in a common enterprise, with profits to be derived solely from the efforts of others.

While both the SEC and Kik agreed that money was being invested, they did not agree on the other qualifications set out.

Judge Hellerstein ruled that Kik did establish a common enterprise, and that there needed to be an expectation of profits.

“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,” he explained.

The judgment mandates that by October 20, “the parties shall jointly submit a proposed judgment for injunctive and monetary relief.”

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