The SEC is suing Canada’s Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens without registering its offer and sale as required by the US securities laws.
According to the SEC’s complaint, Kik, a private company that owns and operates a mobile messaging application called Kik Messenger, had lost money for years on its only product. The regulator said that despite Kik Messenger’s initial success, and the backing of venture capital funding, the company’s costs were significantly greater than its revenues, and it has never been profitable. It also said that the company’s management forecast internally that it would run out of money in 2017.
In an attempt to stave off the company’s demise, Kik changed its business model, which it financed through the sale of digital tokens. The SEC alleges that from May to September 2017, Kik offered and sold 1 trillion digital tokens called “Kin.” More than 10,000 investors worldwide purchased Kin for approximately $100 million in US dollars and digital assets, more than $55 million of which came from US investors. However, the SEC said that Kik’s offer and sale of Kin was not registered with the regulator, and investors did not receive the disclosures required by the federal securities laws.
“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,” Steven Peikin, co-director of the SEC’s Division of Enforcement, said in a release. “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
The complaint also alleges that Kik marketed the Kin tokens as an investment opportunity, telling investors that rising demand would drive up its value.
Kik “enthusiastically” described the Kin offering and Kik’s plans to create, develop, and support what the firm called the “Kin Ecosystem.”
The SEC alleged the company said it would help boost demand for the digital assets by incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that adopt Kin.
“From the initial May 2017 announcement through September 2017, Kik relentlessly pitched Kin and the prospect that Kik’s future efforts to develop the Kin Ecosystem would drive an increase in Kin’s value,” said the SEC in its complaint. “Kik emphasized that only a finite number of tokens would be created and that rising demand for the tokens would cause their value to appreciate.”
However, the SEC alleges that when Kik offered and sold the tokens, these services and systems did not exist, and that there was nothing to purchase using Kin. Kik also allegedly claimed that Kin tokens would immediately trade on secondary markets, and that it would profit from the increased demand that this would generate because it would keep 3 trillion Kin tokens for itself. The Kin offering involved securities transactions, which means the company was required to comply with the registration requirements of the US securities laws.
“Kik told investors they could expect profits from its effort to create a digital ecosystem,” said Robert Cohen, chief of the SEC Enforcement Division’s Cyber Unit. “Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
The SEC’s complaint charges Kik with violating the registration requirements of Section 5 of the Securities Act of 1933, and the regulator is seeking a permanent injunction, disgorgement plus interest, and a penalty.