Mobile messaging app Kik is gearing up for a court battle to challenge the Securities and Exchange Commission’s authority to regulate initial coin offerings (ICOs), the Wall Street Journal reports.
Ted Livingston, chief founder and chief executive officer of the Waterloo, Ontario-based startup, tells the Journal that the company “plans to fight an expected enforcement action from the Securities and Exchange Commission over a 2017 initial coin online offering.” The legal battle could have far-reaching implications, not just for ICOs, but for the cryptocurrency market in general.
At issue is Kik’s blockbuster ICO in 2017 that raised $100 million in “kin,” the startup’s own ethereum token. The fundraising was described by TechCrunch as the “highest-profile” ICO undertaken thus far by a consumer internet company.
“We wanted as many people as possible to participate in the Kin token distribution event,” Livingston said in a statement at the time. “Based on the outpouring of support leading up to and during the event, we clearly achieved that goal. We envision Kin as the foundation for a decentralized ecosystem of digital services, starting with Kik, and we couldn’t be more thrilled than to build this new future together with you.”
However, the SEC “believes Kik issued an unregistered security” by selling the kin token, as the Journal notes.
At issue is whether kin should be considered an investment security. The SEC has said most tokens issued in ICOs, public offerings of bitcoin-like digital tokens that exploded in popularity in 2017, fall into that category. Yet Kik and others in the cryptocurrency industry say the tokens represent a new kind of asset that shouldn’t be subject to the same rules as stock or bond offerings.
A court battle with Kik could help determine the scope of the SEC’s authority to tame the unruly ICO market, which has been used by legitimate startups and scammers alike to raise more than $20 billion since 2014. The SEC has taken aim at several token issuers, but a judge in a civil case has yet to rule on the central question of whether ICOs should be considered securities offerings. A loss for the agency could curtail its efforts to root out fraudulent offerings and give rise to a new crop of ICO scams.
Livingston points out to the Journal that the SEC isn’t accusing the company of fraud, but “its enforcement division believes Kik failed to register the sale with the SEC and thus didn’t give investors the proper information.”
More per the Journal:
The company created 10 trillion kin tokens, selling one trillion publicly. Six trillion went to a newly formed nonprofit foundation, and three trillion were retained by the company.
Ostensibly, Kik’s existing shareholders would profit if and when the value of kin rose.
Kik says from the start it marketed kin not as a security but as a “utility token” for developers and the foundation of a new ecosystem of apps and service, of which Kik would be one part.
In a speech delivered last month in New York City, SEC Chairman Jay Clayton said he believes that ICOs can be an effective way for startups to raise money, within legal limits.
“I believe that ICOs can be effective ways for entrepreneurs and others to raise capital,” Clayton said. “However, the novel technological nature of an ICO does not change the fundamental point that, when a security is being offered, our securities laws must be followed.”
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