InWara - ICO Database, ICO review, Security tokens and more

Kik Interactive Vs SEC: What can startups learn?

Kik interactive Vs SEC

In this article, let’s explore what startups can learn from Kik Interactive’s mistakes. If you’re reading this article then there’s a good chance you’re already aware of the Kik Vs SEC debacle. The US regulatory authority has accused the Canadian messaging platform of an alleged securities infraction, as its Kin token distribution event allegedly involved the sale of unregistered securities. 

Notably, Kin raised a whopping $100 million through two token sale events. The first, a private SAFT ( Simple Agreement for Future Tokens) only open to accredited investors under the SEC Regulation D filing. The second, a public token sale that witnessed Kin tokens being sold for ether, According to InWara’s Market Intelligence Platform

This is what a timeline of the events would look like -

 

Kik interactive Vs SEC

With the timeline sorted, let’s see what we can learn from the SEC Vs Kik debacle.

But it’s not just Kik several Blockchain and Crypto projects have faced scrutiny from regulators from around the globe. There’s a lesson to be learned from each case. Our Litigation and Compliance database, delivers a curated list of cases, from around the globe to learn from.

Litigation and Compliance databaseGet Started

 

#1 Kik’s wild claims to recategorize Kin

In its response to the SEC Wells notice, Kik interactive describes its Kin tokens as being a digital currency, unlike the SEC claims of it being a security. Here’s an excerpt from the document.

Excerpt from Kik’s Wells submission.

Since the [token distribution event], use of Kin as a currency has continued to increase as developers and consumers use it within the ecosystem. In fact, excluding secondary market transactions, as of today, Kin exceeds Ether and Bitcoin (which Director Hinman does not believe are securities) in daily blockchain activity, demonstrating Kin’s wide acceptance and adoption. (See https://blocktivity.info/.) Indeed, of the over 2,000 tokens in circulation, Kin is ranked as having the fifth highest daily blockchain activity.

Further, while not specifically designed for physical goods, Kin can be used to buy items such as sunglasses and vehicles. (See Mrs. Shivas, ThirdEyeSunglasses.com Will Now Accept Kin Coin, Third Eye Sunglasses, Jan. 2, 201813; see also Spectrum Auto Sales interview with “the Kin Realist,” (accepting Kin for vehicles).) Moreover, there is a publicly available, open-sourced software developer kit (“SDK”) that allows any developer to integrate Kin within his or her application. Notably, Kin in Kinit, discussed below, was the first cryptocurrency approved to be earned and spent in an Apple iOS application. Both the Google Play and Apple App Stores allow Kin to be used as a currency within their respective platforms, where Kin has also been adopted, integrated, and used in over 30 digital applications (the vast majority of which were not developed by Kik) …

Notably, roughly half the applications that have integrated Kin were built specifically for Kin, showing that Kin has created the foundation for not only existing businesses to monetize, but for new businesses as well. Such usage only continues to grow as Kin moves towards being the most widely used cryptocurrency in the world.”, according to Kik’s submission.

So what’s the problem here? 

A couple of things. The general idea being peddled here is that Kin is not a security and shouldn’t be regulated by the Securities Act but instead is a digital currency like Bitcoin and Ether. Further, the people who have bought Kin token did not do so expecting profits or as an investment in Kik. Instead, they use Kin token to buy things like sunglasses and vehicles. Also, Kik is a thriving ecosystem where developers can build and release their apps, similar to Ethereum. 

But little of this is true. 

Firstly, Kik’s claim that its Kin tokens are a widely used cryptocurrency much like Bitcoin and Ethereum was proven to false, according to an on-chain analysis report by Coin Metrics. Many of the accounts created that were included in Kik’s claim were largely left empty. The report also emphasizes that even though Kik had a massive number of on-chain payments it was well below the major Blockchians like Ether and Bitcoin in terms of the transfer value. 

Secondly, the report focuses on Kik’s second claim that Kin tokens should not be considered as a security, instead it should be treated as a currency. But this again is not entirely true. There are only ~35000 wallet holding 10,000 Kin tokens ($0.23) during its peak. For comparison, the major Blockchains have at least 1 million wallets holding at least $1. This is orders of magnitude more than Kin token. On top of this, the Kin token has a market cap of only $13 million as of August 2019 which is hardly 1/8th of its ICO valuation.


Like the charts? You'll love our platform Get started

 

#2 The problem with Kik’s ICO


According to a document released by the SEC, and mentioned in the first infographic. By early 2017 Kik was facing a massive cash crunch. Despite raising as much as $120 million in Venture Capital, Kik had almost negligible revenue. On top of this, Kik messaging app witnessed a declining user base over the years, with a majority migrating to more trendy apps like Whatsapp and Telegram. The company even hired an investment bank to try to get acquired by a larger tech company, but this effort was in vain. In a tumultuous time like this, Kik decides to launch a token offering of a highly speculative investment with limited investor protection or governance rights and widespread marketing to retail investors. The token offering ended up raising $100 million.

The radical shift in Kik’s business model is a problem here. Because at the time of its token sale, its Kin token offered little utility. Simply because the ecosystem wasn’t ready yet. It wasn’t until June 2018, that Kik first released its Kin token on its platform in Beta (source). And in July 2018, Kin foundation released the Kinit beta app on Play store but was restricted to US citizens. 

#3 Marketing to retail investors

According to an official document released by the SEC, Kik had intentionally marketed the “cryptocurrency” aspect of its Kin tokens to appeal to the new wave of crypto investors. Here’s a jarring example — in a meeting on 16th February 2017, between Kik executives and directors. The leadership blatantly discussed the need to appeal to “cryptoinvestors” by highlighting a “50% three-year CAGR [compound annual growth rate]” for its Kin tokens. They also believed that retail investors “would invest in tradable digital tokens of a non-blockchain company if offered good risk-return potential.” …

In another instance, Kik’s CEO Ted Livingston explained to his employees using an email blast, the company’s new plans to raise capital by “selling crypto”. He wrote “more demand” will drive up the prices and hence should “Buy today, sell tomorrow, profit.”.

So you see the problem here? Although Kik claims Kin is a decentralized cryptocurrency, it eventually ends up looking like a securities offering to raise funds. And since Kik didn’t register with the SEC before offering Kin tokens to retail investors in the US. You can see why they’d sue Kik. 

Final thoughts — 

This is part of a bigger problem in the Blockchain and Crypto space where startups are jerry-rigging digital tokens into their ecosystem. To the extent where serious startup accelerators don’t take startups that has a “digital token” just for the sale of it. Granted it’s cool, and makes your startup look cutting edge but is it worth the risk of looking like a security offering? If your intention is to use digital tokens as a means to raise funds, be upfront about that, and restrict investors from certain jurisdictions from participating. 

You can a complete list of the securities regulation in major jurisdictions in our article on Security Token Offerings (STO)

This was a fatal mistake that Kik made. It raised $50 million in through SAFT and offered it only to accredited investors which is fine. But it’s the remaining $50 million raised through its public token offering that’s the problem here. There’s a good chance this might change with new regulation like the Token Taxonomy act which proposes to exempt cryptocurrencies from securities laws. 

Here’s our take on the Token Taxonomy act.


 

Register for a free trial

The Most Trusted

Market Intelligence Platform

Get Started