The U.S. Securities and Exchange Commission has won its lawsuit against Kik Interactive Inc. for conducting an alleged illegal initial coin offering in 2017.
The finding today in favor of the SEC came via a motion for summary judgment from the United States District Court South District of New York after both sides had filed for summary judgments in a case that was filed in June 2019.
The SEC alleged in its lawsuit that the ICO offered by Kik was illegal because the company sold tokens to U.S. investors without registering the offer and sale as required by U.S. security laws. Kik raised $98 million in the ICO in 2017, including $50 million in presales for Kin, an Ethereum blockchain-based cryptocurrency that was pitched both as allowing the company to expand Kik’s features and supporting developers with an open app ecosystem.
While the SEC argued that Kik sold the Kin tokens as an investment opportunity, Kik argued that the ICO was for a currency and hence was not subject to securities law.
The judge agreed with the SEC while noting that there was little precedent for the case, Decrypt reported. The ruling came down to the so-called Howey test created by the Supreme Court in 1946 to ascertain whether certain transactions qualify as investment contracts under the Securities and Exchange Act of 1934.
One of the biggest issues for Kik’s argument is that it had itself described the Kin tokens as securities in the initial presale. “Kik concedes that its issuance of Kin through the [token distribution event] involved an investment of money by which participants purchased or acquired Ether and exchanged Ether for Kin. Thus, the parties agree that the first element of the Howey test is satisfied,” Judge Alvin Hellerstein said in the ruling. The first element of the Howey test is there must be an investment of money.
The dispute then came down to second and third elements to determine a security — the second being an investment of money in a common enterprise and the third being an enterprise established for profit to be derived solely from the efforts of others.
“Kik established a common enterprise,” the judge wrote on the second element. “Kik deposited the funds into a single bank account. Kik used the funds for its operations, including the construction of the digital ecosystem it promoted.”
On determining that Kik met the third element, the judge said that “in public statements and at public events promoting Kin, Kik extolled Kin’s profit-making potential.” While noting that Kik later claimed that Kin was also a medium for consumptive use, a “general purpose cryptocurrency for use in everyday digital services,” the judge stated that “none of this ‘consumptive use’ was available at the time of the distribution.”
Kik Chief Executive Officer Ted Livingston told Coindesk that he was “disappointed in this ruling” and that the company is considering its options, including a potential appeal.
Pending a potential appeal from Kik, the next step is for both sides to “jointly submit a proposed judgment for injunctive and monetary relief” by Oct. 20.
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