SEC sues Kik for US$100M for 'illegal' securities offering of digital tokens

The U.S. Securities and Exchange Commission has sued Ontario-based Kik Interactive Inc. for conducting an "illegal" US$100 million securities offering of digital tokens.

The securities regulator said in a complaint filed Tuesday that the Kitchener-based company sold the tokens to U.S. investors in 2017 without registering their offer and sale, or providing proper disclosure, as required by U.S. securities laws. The SEC said this constituted an initial coin offering, or ICO.

Kik's chief executive Ted Livingston said in a tweet containing a link to the SEC's announcement that the company is "excited" to take on the U.S. regulator in court and is "confident" it will win.

In an emailed statement, he said: "This is the first time that we're finally on a path to getting the clarity we so desperately need as an industry to be able to continue to innovate and build." 

The SEC alleges in its complaint that Kik lost money "for years" on its main product, an instant messaging platform called Kik Messenger, and it sought to raise money for a new type of business by selling digital tokens.

The regulator says from May to September 2017, Kik offered and sold one trillion digital tokens called Kin for approximately US$100 million to more than 10,000 investors, of which US$55 million came from U.S. based buyers.

Investors based in Canada, however, were barred from buying Kin after what Kik called "weak guidance" from the Ontario Securities Commission.

"Despite our best efforts to work with the OSC, they have failed to give us clear direction on when Canadian securities law will or, more importantly, will not apply," Livingston said in a 2017 blog post. "Our Kin project needs to move forward, so to avoid risks arising from this uncertainty, we, a Canadian company, have decided to move forward without Canada."

The SEC alleges that Kik marketed the tokens as an investment opportunity and told investors that rising demand would drive up the value of Kin. It added that Kik pledged to take steps to spur demand by incorporating the tokens into its namesake messaging app, creating a new Kin transaction service as well as a system to reward companies that adopt the digital token.

"At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin,"  it said.

Half value 

The regulator added in its complaint that Kin tokens recently traded at roughly half of the value that public investors paid in the offering.

"By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions," said Steven Peikin, the SEC's co-director of its enforcement division in a statement.   

"Companies do not face a binary choice between innovation and compliance with the federal securities laws."

Livingston said in a blog post that Kik first heard from the SEC a few days after its token sale had already started and four months after the company first announced it. The conversation began as a "friendly" contact for information, but then ramped up and culminated with the SEC in November 2018 issuing a Wells Notice outlining why it believed there was a securities infraction, he added in the blog.

He argued in the Jan. 27 post that Kin is a currency, with "hundreds of thousands of people" having exchanged it for goods and services, but currency is excluded from the 1934 Securities Exchange Act's definition of a security. 

Kik recently launched a website called Defend Crypto, on which it has crowdfunded US$4.27 million worth of cryptocurrency to put towards its legal fight against the SEC.

"The SEC has been shaping the future of crypto behind the scenes with settlements that set a dangerous precedent and stifle innovation," the website says. "Kin is unwilling to let that happen."