On June 4, 2019, the United States Securities and Exchange Commission (SEC) announced that it had sued Kik Interactive Inc. (Kik) for what it alleges is an illegal USD$100 million securities offering of digital tokens (more commonly referred to as an initial coin offering or ICO). The SEC charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.
As alleged in the SEC’s complaint, Kik had lost money for years on its sole product, an online messaging application, and the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to transition to a new type of business, which it financed through the sale of one trillion digital tokens. Kik sold its “Kin” tokens, raising more than US$55 million from U.S. investors.
The SEC complaint further alleges that Kik marketed the Kin tokens as an investment opportunity. Kik allegedly promised investors that rising demand would drive up the value of Kin, and that Kik would undertake crucial work to spur that demand. The SEC alleges that at the time Kik offered and sold the tokens, the promised services and systems did not exist and there was nothing to purchase using Kin. Kik also allegedly claimed that it would keep three trillion Kin tokens, Kin tokens would immediately trade on secondary markets, and Kik would profit alongside investors from the increased demand that it would foster.
According to the SEC, the Kin offering involved securities transactions, and Kik was required to comply with the registration requirements of the U.S. securities laws. The SEC seeks a permanent injunction, disgorgement plus interest, and a penalty.
Kik had barred Canadians from participating in the offering after the Ontario Securities Commission concluded that the token offering would likely violate Ontario securities law because the tokens were securities.
You can read the SEC announcement here.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.