In brief
- In the latest documents from the US SEC’s suit against Kik, the Commission makes a strong argument that the Kin token was sold as an investment contract.
- Preston Byrne of Anderson Kill believes we’re nearing the end of the road for Kik’s case.
- If the court accepts the SEC’s rationale, Kik could bend under the same logic that brought down Telegram in its own token case against the SEC.
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On Friday, the SEC argued in a filing to a New York court that the messenger app, Kik, illegally raised $100 million in its 2017 token sale for its cryptocurrency, Kin. Kik, in its own filing, refuted this.
Each party’s filing responds to arguments made by the other party in separate filings last month. Should the court consider the case closed, it will issue a ruling on May 8, pending appeals by the losing party. Otherwise, the case may progress to a trial.
But the consequences of the case, which has now taken almost a year, will have huge consequences for crypto companies that raised money through Simple Agreement for Future Tokens (SAFT) agreements.
SAFTs were cooked up by a coterie of New York lawyers at the height of the 2017 boom to circumvent securities laws around token sales. They allowed token issuers to promise future delivery of a token, instead of selling the token on the spot.
The hope was that, when the tokens were eventually delivered, they would have “lost their character as securities,” Preston Byrne, a partner at Anderson Kill law firm, told Decrypt.
But the SEC doesn’t think that SAFTs circumvent securities law. In its most recent filing against Kik, the SEC “is trying to drive another nail into the coffin of the SAFT investment contract,” said Byrne.
The SEC argued in March that Kik knew its token sale would transgress US securities laws all along. Kik, in defense, has routinely argued that “investment contract” is too vague for Kin, which is a currency, it argues, not an investment contract.
The commission further argues that a significant portion of Kik’s token buyers were not accredited investors. If Kin had sold only to accredited investors, they may have been exempted from securities regulation.
Rather, purchasers were mostly crypto OTCs and exchanges, whose intent was to sell them to the public for a profit, the SEC argued. Byrne referred to this as “a disguised public distribution.”
We’ve been here before…
A New York Court last month granted the SEC a temporary injunction against messenger app Telegram, effectively barring it from distributing tokens from its $1.7 billion ICO, which the SEC claims was illegally raised. Telegram’s ICO was a SAFT sale, like Kik’s.
Bryne said that the SEC is approaching the Kik case exactly like the Telegram case. If the court rules in the SEC’s favor, Byrne says this will be another hard signal that the land of the free is not the place to launch a token project.
They’re certainly setting an example with Kik, which recently laid off 80% of its staff as legal fees have brought the company to the brink of bankruptcy.
Kik refutes the claim that Telegram is a precedent for them. "The Telegram court was able to issue a preliminary injunction to prevent that public distribution. But, the case has not gone to trial, and the Telegram ruling is not binding precedent in our case," a spokesperson told Decrypt.
Still, any companies looking to launch a token might think twice.
Editor's note: This article has been updated to include a comment from Kik.