A New Lawsuit Could Hamstring the Entire US ICO Market

June 24, 2019

picture of the SEC logo on a mobile phone After a warning, the SEC sued Kik, and the suit is shaping up to be a financial securities law inflection point. It could significantly impact how the SEC defines a crypto “common enterprise.”

SEC v. Kik: Origin Story

In 2017, Kik, a Canadian company, held an initial coin offering for its ERC-20 token on the Ethereum blockchain. A popular opportunity, the ICO garnered about $100 million. As part of its initial offering, Kik developed a “minimum viable product” — a digital sticker pack. The idea was that Kin investors could use their tokens to purchase items within Kik’s sticker network.

The development of the sticker package had a regulatory purpose. According to the current rules, cryptocurrencies that allow U.S. participation typically must register with the Securities and Exchange Commission because they’re considered a “common enterprise.”

To determine if an opportunity must comply with registration regulations, officials apply the four-part Howey test. It defines an investment contract as one where the backer:

  1. Invests money;
  2. In a common enterprise;
  3. With the hope of turning a profit;
  4. Based on the efforts of the orchestrating company or related third party.

If, however, the token offered in an ICO doesn’t fit these parameters, the company doesn’t have to register as a security with the SEC or provide disclosure forms. So to avoid SEC bureaucracy, some ICOs developed marketplaces for their tokens. For its part, Kik created the sticker program for this purpose.

When the SEC first sent an inquiry letter to the company about its ICO, Kik argued that it didn’t have to register with the SEC. Since Kin had inherent value as a currency within the “Kin economy,” they reasoned, its valuation increase is no different than a baseball card gaining value over time.

The SEC is Moving Forward with its Kik ICO Lawsuit

The SEC didn’t agree with the company’s argument and slammed Kik with a lawsuit. In the eyes of the agency:

  • Kik marketed its token as a security. In a press release, the SEC stated that “Kik allegedly told investors that rising demand would drive up the value of Kin and that Kik would undertake crucial work to spur that demand, including by incorporating the tokens into its messaging app.”
  • Initial investors could purchase very little with Kin, which had never been joined with the Kik app.
  • Since Kin was an ERC-20 token, it would have crippled the Ethereum network, which isn’t known for its scalability, thus diminishing the company’s “kin economy” argument.

According to reports, the SEC allegedly has proof that a Kik executive once admitted that the sticker program was all about “COMPLIANCE” and existed “to make [their] legal department happy.”

What Next for Kik?

Kik launched a crowdfunding campaign to finance counsel for this fight with the SEC. It’s become a major rallying issue for the crypto community. After all, a loss for Kik could severely hamstring the entire ICO ecosystem. An SEC win could render ICOs moot stateside.

Connect with an ICO Attorney

In the ICO boom’s early days, the SEC focused on fraud. But now the agency is branching out and examining registration and regulatory violations.

The time is now to connect with a cryptocurrency ICO lawyer, like the Gordon Law Group. Get in touch today to get your crypto business compliant and avoid run-ins with the SEC or IRS.

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