SEC obtains $5-million (U.S.) fine for Kik Interactive
2020-10-21 20:51 ET - Street Wire
by Mike Caswell
The U.S. Securities and Exchange Commission has won a $5-million judgment against Ontario's Kik Interactive Inc. over a so-called initial coin offering. (All figures are in U.S. dollars.) The SEC said that Kik improperly raised $100-million from investors, issuing something that qualified as a security without making the appropriate regulatory filings. Investors, who were told that they could "make a ton of money," lost as much as half of their investment, the SEC claimed.
The penalty for Kik is contained in a judgment filed on Wednesday, Oct. 21, in federal court in New York. In addition to the $5-million fine, the judge imposed a permanent restraining order that bars Kik from issuing any future securities without filing the appropriate registration statement with the SEC. The order also directs Kik to notify the SEC 45 days in advance of future offerings.
The fine represents a settlement of sorts, with Kik agreeing to pay the money without a hearing. The settlement, however, comes after the judge previously found that Kik's offering violated securities laws. Kik had claimed that its coins did not constitute a security and it was not required to follow the same procedure as a company issuing shares would. The judge, noting that there was very little law on the subject, found that the coins were indeed a security and were subject to the same rules as other tradable instruments (such as filing a registration statement with the SEC and making the same disclosure to investors as is done with other securities).
The $5-million fine comes over one year after the SEC charged Kik, filing a civil complaint in federal court in New York on June 4, 2019. The case stemmed from one trillion "Kin" tokens that Kik offered in 2017. The tokens would be integrated into a messaging app that Kik operated. The idea was that users would spend the tokens to buy digital cartoon "stickers" that would provide some sort of benefit in the messenger app.
It was not entirely clear how the company intended to value the Kin tokens, but it was clear that investors took an interest in them. The tokens appeared in 2017, when cryptocurrency was a hot topic. Through presentations in New York, San Francisco and other cities, Kik was able to convince investors to buy the tokens in large quantities, the SEC said.
Among other things, the company told investors that there would be a finite number of tokens, and rising demand for them would cause their value to increase. The company assured investors that the tokens would trade on exchanges and would be convertible into other digital currencies such as bitcoin or ether. Kik described the tokens as an opportunity for investors to "make a ton of money." Unfortunately for those investors, the tokens did not turn out quite as envisioned. When Kik distributed the tokens, there was no market for them, the SEC said. The only place the tokens traded was on an unregulated platform, where they were worth half of their value by the time the SEC filed the charges.
The SEC said that Kik should have made full disclosure to investors when it issued the tokens, with that disclosure including information on Kik's then-bleak financial picture. At the time, the company was burning through $3-million per month and had $26-million left in the bank, the SEC said. The Kin tokens were a way for the company to rescue itself from its financial trouble, according to the SEC. (As it turned out, Kik struck a deal in 2019 to sell its flagship messenger app to another company and reduced its employee count to 19 from 100.)
Kik had contested the SEC's case, complaining that regulator presented a "highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event." The company said that crypto tokens were unlike any other asset and required a new regulatory structure. At one point, Kik even had a website, defendcrypto.org, dedicated to its defence effort