The SEC or Securities and Exchange Commission of the United States raised a case against the messenger app maker called Kik for its $100 million ICO – which the agency contends has been an unregistered securities sale – and the regulator seems to have built up quite a strong case in its initial court move.
The SEC accusing Kik of violating the federal securities law
In one complaint, which has been filed on Tuesday, the Securities and Exchange Commission alleged that Kik violated the federal securities law as it has not registered its kin token sale. Responding to the complaint, the general counsel of Kik, named Eileen Lyon, the criticism of SEC actually makes a couple of inaccurate assumptions which stretch the Howey test well beyond its definition, and also that the push of the agency is not going to withstand judicial scrutiny.
The principal at Smolinksi Rosario Law, named Nelson Rosario, said that the complaint of SEC against Kik has been quite similar to others which were brought against some other ICOs or initial coin offering, particularly concerning the evidence which the regulator puts forth.
But, the most distinguishing feature of the whole case may be that is precisely focused on a violation of the rules from Section 5, Securities Act of 1933. The general counsel at Compound Finance, named Jake Chervinsky, said that until recently, all of the contested enforcement actions of SEC involved elements of intentional misconduct or fraud.
He added that the action of Kik is essential as it represents the first contested enforcement action of SEC for a clear regulatory violation – that means, a case where a token issuer merely was not successful in registering with the SEC based on its reasonable faith interpretation of the law.
Rosario also noted that this case didn’t involve any kind of alleged fraud, as also did Stephen Palley, the attorney with Anderson Kill. Palley said that this is straight up “you didn’t register,” this is not securities fraud, and the allegation there is “you had security, and you didn’t register it.”
SEC including a significant number of facts in the case
One attorney for Carlton Fields, and also general counsel to Athena Blockchain, named Drew Hinkes, said that the SEC included a critical number of facts in its case. The regulator even provided evidence which was sourced from YouTube, Twitter, and Slack messages.
He said that the SEC has a ton of documentary evidence and a ton of facts. This argument has been repeated by Palley and Katherine Wu, who is an independent legal researcher.
The facts are probably the same facts which Kik is going to use to argue that it didn’t violate the Securities Act. Furthermore, Hinkes noted that the points are not as crucial as the way the law is applied to the facts. However, on the events is where the precedent may be set.
Wu even said that in her own view, the token sale of Kik from 2017 has been quite typical of other ICOs at the time. Those facts which SEC used to allege Kik violated securities registration requirements could then implicate some other token sales, especially those that conducted sales right after the DAO report has been published the same year.
To some, the case of SEC has been all but inevitable. Chervinsky said that the regulator invited crypto startups to work with it, giving companies the chance to comply with some federal securities laws. He even noted that the regulator was investigating numbers of companies which conducted ICOs, but Kik is the primary one to go to the court for a registration violation.
Similarly to this, Palley said that this case shouldn’t be a surprise, and Kik likely anticipated the complaint. This particular anticipation could also be the reason why the company started crowdfunding its legal defense, referencing the Defend Crypto campaign announced recently which Kik launched last week.
Is the case going to proceed further on?
One of the sponsors of the campaign, named Michael Arrington, said that he does not speak for the company and he hasn’t spoken to them since the news, but from their perspective, this has been anticipated and has been the whole point of the campaign.
He added that when Kik published its Wells response, it essentially threw down the gauntlet, as well as challenged the SEC to raise a case. The fact that they did so recently should not surprise anyone. Kik got what it really wanted: a fight in open court rather than behind the closed doors of SEC.
The fact that Kik has already been an established company before its ICO means that the outcome of this particular case could have a more significant effect in comparison to others. Rosario also noted that the sale of Kik involved some quite sophisticated parties.
With that being said, this case has only just started. The SEC could have loud complaints, but that doesn’t necessarily mean that the situation is going to proceed further on.
The jury or court may not read the complaint as a scathing indictment and it entirely possible that Kik and the SEC are going to come to a settlement before the jury trial is reached.
In fact, SEC’s complaint discusses how the Kik Corporation has been declining, and its messaging app has been losing revenue, as well as losing users, but it suddenly launched crypto. That may or may not be the case, but it is not the job of SEC to judge business models. That is designed to make the jury think that they have fraudulent purposes.