CRYPTO CRACKDOWN: SEC sues social media startup over $100 million ICO

SEC: No promoting without proper disclosure

The U.S. Securities and Exchange Commission (SEC) is suing Kik, claiming that the company’s US$100 million [AU$143 million] ICO in 2017 was illegal.

Kik Interactive Inc. sold one trillion digital tokens, called Kin, during its ICO, raising more than $55 million from U.S. investors alone.

“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,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.

The crux of the matter

The SEC maintains that the ICO was illegal as the company, based in Canada, did not register the token sale with the government body, which is required by U.S. securities laws as the SEC views the sale of Kin as a securities transaction.

The SEC is suing Kik over their ICO.

The complaint made by the SEC takes aim at several key features of the ICO run by Kik.

The agency cites internal communications within Kik that indicated that the company would run completely out of cash in 2017 due to its sole product – a messaging application – losing money year after year.

As a result, the company decided to abandon its old business model in favor of a new crypto-based one featuring the Kin token.

Kik allegedly marketed the Kin token as an investment opportunity, telling investors that the digital asset would go up in price due to increased demand and promotion by Kik.

The company said it would foster the growth of the Kin token in three ways: incorporating the cryptocurrency into its messaging app, creating a system that would offer rewards to other companies that adopted the Kin token, and creating a Kin transaction service.

However, the SEC says that none of the systems and services cited by Kik actually existed when the ICO took place.

Speaking on the matter, Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, noted that “Kik told investors they could expect profits from its effort to create a digital ecosystem.”

“Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws,” he added.

Kin is trading for half of its ICO price.

Overall, the SEC is charging Kik with violating the registration requirements of Section 5 of the Securities Act of 1933.

The SEC is seeking to put a permanent injunction in place against Kik, as well as a penalty and disgorgement plus interest.

This complaint follows a recommendation by the SEC back in November 2018 to bring an enforcement action against Kik and the Kin token.

Kik is fighting back against the SEC.

Kik fighting back

Kik is not lying down and admitting defeat in the face of the SEC complaint.

Last week, Kik CEO Ted Livingston announced the creation of the Defend Crypto fund to fight the SEC in court, with the stated goal of getting some much-needed regulatory clarity from the U.S. federal government.

The Defend Crypto fund is using Coinbase’s custody services of Coinbase, and Livingston notes that Kik had already spent more than $5 million negotiating with the SEC prior to setting up the fund.

At the time of publication, $4,428,847 has been donated to the Defend Crypto fund.

The fund accepts a variety of cryptocurrencies, including Bitcoin, Ethereum, Ripple, Stellar, EOS, Zcash, Litecoin, and Dai.

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