A Legal Battle Every ICO Project Must Follow: Kin vs. SEC (UPDATED)
Social-media startup Kik Interactive Inc. of Waterloo, Ontario, intends to fight the US Securities and Exchange Commission (SEC) in court over the categorization of their token as a security, arguing that “the tokens represent a new kind of asset that shouldn’t be subject to the same rules as stock or bond offerings.” A legal battle like this could help determine the scope of the SEC’s authority over the ICO (initial coin offering) market and set legal precedent for future cases. (A new paragraph has been added at the end of the first part of the article; updates in the second part - The benefits of clarity - have also been made.)
The cryptocurrency that the startup created, Kin, enjoyed perhaps one of the most high profile ICOs of 2017. This association was enough for it to raise a total of USD 98 million in September 2017, with one Kin being priced at USD 0.0002. The platform already boasts apps that use the token, following a developer incentive program, in order to foster more usage of and innovation around its cryptocurrency.
However, they also ran into trouble with the SEC, which has said most tokens issued in ICOs could be considered investment securities. The SEC isn’t accusing Kik of fraud, Kik CEO Ted Livingston told the Wall Street Journal. Rather, its enforcement division believes Kik failed to register the sale with the SEC and thus didn’t give investors the proper information. That can’t happen until the SEC’s commissioners vote on the matter, and it is unclear if they’ve done so.
In a response to the SEC’s claim that the Kin token is a security, Kik replied, “The proposed enforcement action against Kik and the Kin Foundation exceeds the Commission’s statutory authority,” as well as, “The Chair of the Commission has said repeatedly that the Commission does not want to squelch innovation in the blockchain and cryptocurrency industry [...] bringing the proposed enforcement action against Kik and the Foundation would amount to doubling down on a deeply flawed regulatory and enforcement approach.”
Taking the issue to court could finally shed light on the central question of whether ICOs should be considered securities offerings and how much authority the SEC has over the nascent space. For now, Kik believes that the Commission is taking it much too far:
“The industry is not asking for the Commission to change the law to accommodate new technologies [...] On the contrary, through its enforcement efforts, it is the Commission that has stretched the definition of a “security” [...]beyond its original meaning and intent.”
Meanwhile, Ted Livingston stressed that Kin is a currency, not a security. According to the CEO, on page 11 of the 1934 Securities Exchange Act, the very act that created the SEC, it explicitly states that the definition of a security “shall not include currency.”
The benefits of clarity
“The entire crypto community should be focused on this. Kin may set a positive or negative precedent here, if they fail in this hearing a large majority of other projects are likely to fail as well,” points out Reddit user u/damonroe.
"No one knows what the outcome of Kik’s situation will be. Either way, this will be one of the most important legal cases to watch in crypto. The company is well funded, well connected, and you get the sense that they are fighting these potential charges as a way to say “enough is enough” for the entire industry," Anthony Pompliano, co-founder and partner at Morgan Creek Digital, a digital asset management firm, wrote in a blog post today.
According to him, regardless of the outcome, the crypto industry will benefit from increased clarity of the rules and regulations.
Pompliano also stressed that every regulator he's ever spoken with "has been kind, thoughtful, and well intended."
"Unfortunately, the existing rules are based on a court decision over an orange grove more than 70 years ago," he said, reminding that SEC doesn’t have final say on whether something is a security or not.
As reported by Cryptonews.com in November, a federal judge denied the SEC’s request to freeze assets belonging to crypto startup Blockvest based on alleged violations of securities laws. The judge ruled that the SEC has not proven that Blockvest and its founder Reginald Buddy Ringgold violated federal securities laws.
Meanwhile, Mati Greenspan, senior market analyst at cryptocurrency exchange eToro, tweeted:
As an investor, I'd rather hear news of Ted building a killer app to house the tokens than fighting the SEC. Hope they win, but this whole story is setting back progress.— Mati Greenspan (@MatiGreenspan) January 27, 2019
Still, others don’t believe that this is a setback in any way - “If anything, this is self defense against a painful death! Plus it means setting a precedent for the crypto industry, one nobody was willing to take up to now!” Twitter user @draculassi replied to Greenspan’s comment.