SEC-Kik Decision Was ‘Just a Matter of Time’

A US court yesterday agreed with the SEC that Kik Interactive offered and sold securities in the US—its token Kik—without being authorized to do so.

It had been a long wait for Kik followers since oral arguments ended in court on July 9. Kik fans have had to hold out for 83 days, hoping for a favourable decision. But for one lawyer, the result was never going to go any other way.

“It was just a matter of time. In my view, there are three key points in the decision,” Marc Boiron, blockchain and fintech attorney at Manatt, Phelps and Phillips LLP, told Decrypt. 

According to Boiron, these three key points establish what a common enterprise is, whether two sales can be considered an “integrated” offering of securities, and whether or not the Kin cryptocurrency was itself a security. 

For background, Kik Interactive created the Kin cryptocurrency to monetize their messaging service. In 2017, Kik sold $50 million worth of Kin tokens to private investors, then generated just under $50 million itself in a public sale a few weeks later. Two years later, the SEC charged Kik with violating Section 5 of the Securities Act—a case that’s taken 15 months to solve.

Common enterprises

For something to be considered a security, an investment of money must take place in a common enterprise. 

Kik disagreed that a common enterprise was established, but Judge Hellerstein, who issued the summary judgement order, said Kik did exactly this.

“Kik established a common enterprise. Kik deposited the funds into a single bank account. Kik used the funds for its operations, including the construction of the digital ecosystem it promoted,” Judge Hellerstein said. 

The law on this point is clear, but the decision put an end to one of Kik’s long-held positions. “Nothing is novel in this conclusion but it is notable because Kik pushed the narrative so hard,” Boiron said. 

Integrated securities

The second relevant point in this decision establishes that the private and public sales of Kin tokens constituted an integrated offering of securities.

The private sale, which came before the public sale, opened up Kin tokens to 50 investors. Referred to as a “Simple Agreement for Future Tokens,” or SAFT, the private sale provided these investors with a discount. 

“The concept is that when two securities are offered in ways that appear independent of one another, they can be treated as one offering under securities laws,” Boiron said. In other words, the SAFT gives investors a right to the Kin tokens at a later date, but the court ruling concluded that these tokens came under the initial sale by extension. 

Kin tokens as a security

The final key point, according to Boiron, is that Kin tokens have been considered as a security themselves. 

In other words, Kin tokens in and of themselves were established as the security, rather than viewing Kin tokens and the promise or expectation of profit as the security.

The court saw little reason to make this distinction, because neither Kik nor the SEC made the distinction themselves. 

“The court reached the right conclusion, which is that Kik sold a security in the form of an investment contract in an integrated offering of the SAFT and the public sale,” Boiron added.

And the crypto community finally has its answer.