SEC Wins Lawsuit vs. Kik ICO, Company Considers An Appeal

The Securities and Exchange Commission (SEC) has won a lawsuit filed against Kik Interactive for allegedly selling $100 million in securities illegally through an initial coin offering (ICO) in 2017.

Wednesday's ruling in favor of the SEC came from a district court that granted the regulator its motion for summary judgment against Kik for selling Kin tokens, citing violation of federal securities law. The case was filed in June 2019.

Since both parties filed motions for summary judgment, the court case ends without a trial, news outlet Decrypt reported.

Kik originally sold $50 million worth of Kin tokens between June and September 2017 in a private sale to investors. The investors, through a "Simple Agreement for Future Tokens (SAFT)" knew that the tokens they received were sold to them at a discount and that they were buying a security.

Kik later held a public sale, or ICO, which brought $49.2 million. Decrypt noted that at that time, there were no governing rules from the SEC regarding cryptocurrencies, although it did release a DAO report in July 2017 that set rough guidelines for digital tokens.

In 2019, SEC charged Kik with violating a section of the Securities Act as it sold securities without the proper registration. By September 2019, Kik shut down its app. Its CEO Ted Livingston said SEC's position of labeling Kin as a security would make it less useful as an online payment system.

The SEC's argument was based on whether the sale met the Howey Test, a test used since 1946 to identify a security. Essentially, something is considered an investment when a person invests his money in a common enterprise, expects profits, and those profits are derived from the efforts of others.

Kik agreed there was an investment of money but argued on the other points -- that the money was invested in a common enterprise and that profits were derived from the expectation of others, Decrypt reported. Judge Alvin Hellerstein, who delivered the ruling, countered that Kik put the funds in a single bank account. The judge added that the CEO also promoted Kin at public events by explaining how the role of supply and demand would drive the value of the token.

The judge also asked both parties to "jointly" submit a proposed judgment regarding "injunctive and monetary relief" by Oct. 20.

Kik released a statement Wednesday saying it was disappointed with the ruling. "We are considering all of our options, including filing an appeal. To be clear, Kik has always supported the Commission's goal of protecting investors, and we take compliance seriously," Livingston said in the statement.