Under Fire from the SEC, Kik’s Crypto Project is Going to War

Canadian messaging app company Kik Interactive Inc. is planning to take the SEC to court over a potential enforcement action against Kik’s 2017 initial coin offering (ICO) of the Waterloo, Ontario-based tech company’s proprietary cryptocurrency, Kin.

A Kik representative told CCN the stakes are high for the entire cryptocurrency industry:

We are unsure of how the Commission will vote, but we believe that any enforcement action against Kik, Kin, and the foundation would be detrimental to the entire cryptocurrency industry.

Kik CEO Ted Livingston told the Wall Street Journal about his company’s upcoming legal battle with the Washington D.C. regulatory giant, and wrote more about it on his Medium blog.

Highlights from Kik CEO Ted Livingston’s Statement

Kin, the cryptocurrency launched by Kik Interactive, is under fire from US regulators at the SEC. | Source: Shutterstock

This comes after SEC Chair Jay Clayton said “I believe every ICO I’ve seen is a security.” That includes almost every cryptocurrency, from Ethereum on down.

This is the thing that everyone in the industry is dealing with, but nobody wants to talk about. For all of us to be able to continue hiring, innovating, and competing, we need to change that.

This situation is not unique to Kik. There are dozens of projects at a similar point with the SEC. We all believe that this industry needs regulation, but we also believe that this is not the way to get it.

Livingston: Not All Crypto Tokens are Securities

On page 11 of the 1934 Securities Exchange Act, the very act that created the SEC, it explicitly states that the definition of a security “shall not include currency.”

Today you can earn and spend Kin in over 30 apps live in the Google Play and iOS App Stores. Already, hundreds of thousands of people have exchanged Kin for goods and services. Kin is one cryptocurrency that truly is a currency.

Livingston is correct about the 1934 Securities Exchange Act (though lawyers differ on his interpretation):

The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement… but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance.

Kin Was Designed, Marketed, Offered and Used as a Crypto-Currency

In Kik Interactive’s official Wells Response to the SEC, Kick says:

[T]he Staff’s proposed enforcement action against Kik and the Kin Foundation will likewise fail any rigorous analysis of whether offers and sales of Kin amounted to offers or sales of a “security” within the scope of Section 5 of the ’33 Act. Kin was designed, marketed, and offered as a currency to be used as a medium of exchange within a new digital economy.

This takes it outside the statutory definition of a “security” under the federal securities laws, and gives it a consumptive use that is inconsistent with an investment purpose. Simply put, Kik did not offer or promote Kin as a passive investment opportunity. Doing so would have doomed the project, which could only succeed if Kin purchasers used Kin as a medium of exchange (rather than simply holding it as a passive investment).

Kik Interactive told CCN in a statement:

Our official Wells Response reinforces our position that the Commission will not and cannot demonstrate that Kin is a security. We believed, and still believe, that we were in compliance with the application of federal securities laws to public token sales, even with the limited guidance offered by the Commission.

Ted Livingston Image from TechCrunch/Flickr