Kik Says SEC Lawsuit ‘Twisted Facts’ About Startup’s $100 Million Token Sale

Nikhilesh De
Aug 7, 2019 at 01:06 UTC
Updated Aug 7, 2019 at 11:15 UTC
news

The Takeaway:

  • Kik claims the SEC took executives’ comments out of context in a suit alleging the startup’s 2017 token sale violated securities laws.
  • In a new filing, Kik – which raised $100 million from the sale – also said it has been looking at cryptocurrency since 2012, and did not use it as a last-minute pivot, as the SEC alleged.
  • The Toronto-based company says Canadian regulators never made a final determination on whether the token was a security, contradicting their U.S. counterparts’ claims.

Kik said the U.S. Securities and Exchange Commission (SEC) manipulated facts and took comments out of context in the regulator’s lawsuit against the startup over its 2017 token sale.

In a 130-page filing Wednesday, Kik laid out a paragraph-by-paragraph rebuttal of the SEC’s arguments and flatly denied its core allegation that the company conducted an unregistered securities offering.

CEO Ted Livingston told CoinDesk the SEC was “playing dirty” in its June complaint by trying to “simply make [Kik] look bad,” adding:

“What really surprised us is just what lengths the SEC went to twist the facts. They cut quotes and [took them out of context] and that’s something we didn’t expect from the SEC.”

The SEC’s complaint alleges that Toronto-based Kik offered unregistered securities in the form of kin tokens to U.S. investors in an attempt to keep the messaging platform going when revenue failed to materialize.

Kik maintains that its public offering of kin was not a securities sale. In the response, Kik’s attorneys wrote that the SEC recognized its claim was weak and therefore created a “highly selective and misleading” picture of the circumstances of the sale.

The plaintiffs and defendants have met with a judge in the U.S. Court for the Southern District of New York to work out a timeline for going to trial, Livingston said. Kik has asked for a May 2020 trial date, while the SEC has reportedly asked for a date later in the year.

“We wanted this to be resolved as fast as possible,” he said. The judge did not pick a trial date, but, apparently chose Kik’s timetable on discovery, which will conclude by November 2019. Livingston added:

“We’re very confident in our case.”

Out of context

The SEC’s complaint included a number of quotes from Kik board members and executives purporting to show that the company needed to conduct a token sale as a potential securities offering.

The most seemingly damning comment was from an unidentified board member, who apparently referred to the token sale as a “hail Mary,” a term for acts of desperation. However, Kik says that while the board member did write this phrase in an email, its board and executive team did not see the project as “a … final attempt to save a dying company.”

Another board member, “consistent with the Board and Executive Team’s view at the time,” went so far as to write:

“The more I think about it, I think this is a great idea. People call it a hail Mary but to me that is a longshot and I really do not think it is a long shot.”

Livingston told CoinDesk that the quote came from a private email provided to the SEC as part of the discovery process.

In its complaint, the SEC also said a consultant warned Kik that “the Kin offering was, potentially, an offering of securities that needed to be registered,” but Kik’s response says that this, too, was taken out of context.

The consultant’s full remarks added that “in the case of a community currency, there is a good basis to argue that this is not a security.”

A third example from the complaint indicated that Kik told its potential customers the company could ensure Kin’s success on its own, which would suggest that there was an expectation of profit from “the efforts of others,” one of the prongs of the so-called Howey test for determining whether something is a security.

Kik’s response says the next line emphasized that kin’s success would depend on “how many other people can we get excited to compete with us, to join us, to work with us and to build this together.”

Two sales

Kik also emphasizes that it did not conduct a single sale for the Kin token, but rather two sales: a private SAFT (Simple Agreement for Future Tokens) and a public token sale. The SEC conflated the two, undermining its case, the company said.

The SAFT was limited to accredited investors and conducted under an SEC Regulation D filing, meaning Kik believed it fell under certain exemptions to federal registration requirements. The second round was public and saw Kin tokens being sold for ether, according to the filing.

The company says it raised about $50 million in U.S. dollars during the pre-sale. Another $50 million was raised in ether from the general public, with 10,000 purchasers, roughly one-third of whom lived in the U.S., participating.

“The SEC seems to be grouping [the sales together],” Livingston said. “I think what’s important in the response is to be very clear about what facts you agree with and what facts you disagree with.”

Elsewhere in the filing, Kik pushes back against the idea that the token sales were a last-ditch effort to generate revenue.

Kik acknowledged that it had hired an investment bank to look into potentially selling the company, but said it had already started looking into “pursuing a cryptocurrency project” before seven potential buyers declined to acquire or merge with it. Livingston had, according to the filing, been looking into a potential cryptocurrency project as far back as 2012.

Moreover, while the SEC complaint claims that the Ontario Securities Commission (OSC) warned Kik that kin might be a securities offering, the response claims that, as far as Kik is aware, the Canadian regulator did not make a final determination.

The OSC told Kik that the Howey framework, which has been one way of assessing whether an asset is a security, might not be applicable to kin, which Kik, in turn, relayed to the SEC, according to the filing.

Broader impact

The SEC’s actions have taken some toll on Kik, Livingston said.

Among the “detrimental impacts” the lawsuit has had include the monetary cost ($6 million to date, according to Livingston), as well as the time Kik has spent compiling documents for discovery and testifying in Washington, which could instead be spent continuing to build the kin ecosystem.

Kik has provided the SEC with more than 50,000 emails and 200 hours of filmed testimony as part of discovery, he said.

Kin’s price has also suffered, with the token tanking the day the lawsuit was filed, falling from $0.000036 to $0.000025.

The cryptocurrency’s price has continued to decline in the months since, trading around $0.000017 as of press time.

Kik has long said that the outcome of its fight with the SEC – regardless of whether kin is deemed to be a security or not – will result in increased clarity over token sales and how securities laws might apply.

Livingston reiterated the hope to CoinDesk, concluding:

“I think this industry is less concerned about what the guidance is and more just that we have it.”

Kik Response to SEC by CoinDesk on Scribd

Kik CEO Ted Livingston, photo by Brady Dale for CoinDesk.

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