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The SEC Vs ICOs: KIK gets sued for unregistered $100 million ICO

ICO regulation

Canadian startup Kik is getting sued by the U.S Securities and Exchanges Commission (SEC) for an unregistered token offering it had conducted in back in 2017, according to an official press release.

Kik had managed to raise a whopping $100 million through the sale of its native Kin token, according to InWara’s market intelligence platform, which the company claimed was an Initial Coin Offering at the time. But the SEC disagrees and argues that Kik violated U.S federal securities laws by not registering the token offering before selling to U.S investors.

So why does the SEC think Kik’s token offering is bound by securities laws?

Kik messenger or just plain Kik is the primary product of Canadian company Kik Interactive and was released over 8 years ago. The company aimed to make Kik messenger the “Wechat of the west” and raised over $120 million in Venture Capital over the years. But the pivotal point in Kik’s history came when the company decided to launch an Initial Coin Offering in 2017, instead of the traditional Venture Capital.

The SEC alleges that Kik messenger was bleeding money for years and was internally predicted to run out of money by 2017. Coincidentally Kik decided to pivot to a new business model in 2017 funded by the sale of 1 trillion Kin tokens. 

It’s not the fact that Kik launched a token offering that violates federal securities laws but how the token offering was marketed by Kik executives. Kik’s ICO was marketed as an “investment opportunity” — Investors were promised by Kik that the rising demand would drive up the price of Kin tokens and Kik itself would work to drive up the prices. And since only a finite number of Kin tokens would ever be created, these actions would make its value appreciate. On top of this, Kik also assured its subscribers that it would keep 3 trillion Kin tokens and following the token offering be able to trade these tokens on the secondary market.

Steven Peikin, Co-Director of the SEC’s Division of Enforcement was quoted saying on the fiasco “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”


The SEC Vs ICOs

Kik is hardly alone — The SEC has been cracking down on numerous ICO projects stating the same reason “is in violation of U.S federal securities laws”, ICO projects like Airfox, Blockvest, and Munchee have all been asked to shut down and return investor funds.

Prior to SEC’s crackdown — USA was the undisputed leader in the Blockchain and crypto space with a large majority of ICOs originating from the US. Now, crypto projects (ICOs and IEOs) tend to restrict token offering to US citizens to avoid any stints with the SEC.

 

ICO regulation

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During May 2019, the US emerged the global leader in terms of number of the crypto projects with as many as 16 token offerings but only 19% of these were compliant with U.S federal securities laws (source). The latest trend in the crypto space — Initial Exchange Offerings (IEOs) also run the same regulatory risk as ICOs.

As Valerie Szczepanik, the SEC’s senior advisor for digital assets and innovation was quoted saying at Consensus 2019 “cryptocurrency exchanges that facilitate token sales for a fee likely meet the legal definition of securities dealers if the issuer or any of the buyers are based in the U.S.” he also added “If they are not registered they will find themselves in trouble in the U.S., if they have a U.S. issuer or U.S. buyers, if they are operating on the U.S. market.”

On the other hand, Asian countries have fully embraced the IEO trend by creating a conducive regulatory environment for these projects to flourish. Check out our IEO report to know more about the latest trend.

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