Updated with comments from Kik CEO Ted Livingston. 

The U.S. Securities and Exchange Commission announced today that it has filed suit against Canada-based messaging startup Kik over its unregistered $100 million ICO. The SEC is asking a federal New York court to force Kik to give all that money back, plus pay interest and penalties.

Kik, for its part, seems to have welcomed the lawsuit. “This is the first time that we’re finally on a path to getting the clarity we so desperately need as an industry to be able to continue to innovate and build," Kik CEO Ted Livingston said in a statement to Decrypt, before pointing us to the firm's legal defense fundraiser.

The SEC claims that Kik’s 2017 token sale constituted an illegal securities offering. But unlike the various other enforcement actions that the SEC has conducted against ICOs over the past year, this is the first time that the Commission will need to prove its allegations in court. 

According to the SEC’s complaint, financial trouble at the messaging app company is what motivated Kik to “pivot” to blockchain, which was “financed through the sale of one trillion digital tokens.” And Kik’s description of the KIN token as a “utility token”—one that would be used within its messaging app, rather than for speculative gains—was disingenuous, says the SEC, since “these services and systems did not exist and there was nothing to purchase using Kin.”

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The complaint further alleges that KIN tokens were marketed across an array of secondary markets and cryptocurrency trading platforms, spurring a speculative rally that, ultimately, left investors with significant losses, at “about half the value.” The sale allegedly raised $55 million from US investors alone.

“Kik told investors they could expect profits from its effort to create a digital ecosystem,” Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, said in the SEC’s press release. “Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”

The allegations are essentially the same as the enforcement actions against Gladius Network, Airfox, Paragoin Coin, and the various other ICO-funded startups that have settled with the SEC. Unlike these startups, however, Kik has vehemently denied the SEC’s allegations and vowed to fight these charges in court. 

In late 2018, the SEC issued Kik with a Wells Notice, which first hinted at a potential infraction. Within a month, Kik gave its response, explaining in a lengthy document why its token sale was not a security. (Though the Ontario Securities Commission had already deemed it to be.) And in January this year, Kik pledged to fight the SEC’s decision—culminating last week, when it set up a fund for its legal defense dubbed “DefendCrypto,” which has already raised $4.7 million.

Indeed, Kik’s endgame is to trounce the SEC so utterly that the agency is forced to redefine the century old Howey test, the regulatory rule-of-thumb used to determine whether an asset is a security—which, incidentally, is the very metric Kik appears to have violated.