A Warning Call: The SEC Sues Kik
Updated: Mar 4, 2020
Start-ups Fight Back but Advisable?
by Mason Borda, CEO, TokenSoft
With the recent news and industry proverbial sigh after the SEC sued Kik, I took to Twitter to share some comments myself. I realized I have a lot more to say about implications from the Kik situation. We all know that Kik sold Kin tokens in 2017, which subsequently raised $100 million, and is now fighting back against the SEC’s remediation attempts. The fact that Kik is not going down easily shows the investment community and the associated companies have lost some respect for the SEC, maybe because it’s been too aggressive with action against cryptocurrency projects generally or maybe because based on the counsel they’ve received many tech companies still don’t believe that regulations apply to them. See defendcrypto.org.
Kik is perhaps a perfect example of everything that was wrong with token sales in 2017 and therefore not the best example to put up a fight against enforcement actions. Here’s some of what Kik did wrong:
Heavily promoted Kin as an investment, including discussion of potential large returns.
Did not sell Kin under an exemption to securities laws or registering the token offering even though regulators warned the industry weeks prior that projects like The DAO met the definition of a security and token sales may be securities offerings.
Did not disclose financial information about the company, including that the company was not profitable and running out of money… essentially Kik created Kin, the token, as an attempt to save the business (not recommended).
Had weak or limited implementation of blockchain tech. As Ted Livingston mentioned himself, the ultimate implementation was centralized, contrary to expectations.
It’s important to note that the SEC’s complaint against Kik is only one side of the story. However, the quotes and fact pattern do not look good for Kik no matter what side of the aisle you sit. Read the full SEC complaint here to form your own views on right and wrong. We like the annotated version from Katherine Wu and other viewpoints such as this thread from attorney Marc Boiron and this one from Drew Hinkes.
From marketing videos on YouTube to broad-based social media marketing, Kin marketed and sold tokens to the general public in and outside of the U.S. rather than only allowing investments from accredited investors. Throughout this marketing campaign, Kin pushed the narrative that buying tokens early would be profitable. These are hallmarks of a securities offering and will likely make for a banner case of SEC enforcement against tokens sales.
We also know that Kik is not alone. In 2017, there were more than 400 token sales that launched. Many of these projects are already talking to the SEC about a settlement or rescission offering and legal tender offering for their ICO tokens in exchange for security tokens some sold under exemptions to securities offering and some registered as Regulation A+ offerings.
TokenSoft has helped token issuers comply with global securities laws since we opened our doors in 2017. Today, we are engaged with token issuers working with the SEC to fix problems from 2017. In our view, many of these projects are better suited to work with the SEC to protect investors and comply with applicable disclosure laws.
If you need support in a rescission and legal tender offer exchange for security tokens, reach out to us for a private conversation at tokensoft.io.
TokenSoft keeps all conversations with you and your counsel confidential under NDA. Each project is unique and we can help you explore options that you may not know are available.