ICO tokens – are they securities or are they something else that does not require strict compliance with SEC regulations, designed to protect investors and force full disclosure before any capital changes hands? In its last annual report, the SEC vowed to step up its activity in this arena, driving fear through the hearts and minds of ICO promoters and their teams of legal advisors, as the long arm of the law threatened to reach back into history. It had been a while since the agency pounced on its last “bad actor”, but the news today is that it “announced a suit against Kik Interactive for the “illegal” sale of unregistered securities”.
The crypto industry was stunned by the timing of this announcement, since the regulatory agency had appeared to be softening to all things crypto, especially after a successful forum held last week in Washington, where “it asked crypto advocates to participate in a host of panel discussions”. As reported: “Crypto attendees came away from these various meetings believing SEC staffers know a lot more than thought.”
As was also reported: “Attorney Stephen Rutenberg, a shareholder at Polsinelli and a member of the firm’s Fintech and Regulation Practice, felt ICOs might get a break: The biggest news of the forum from the SEC is that they appear willing to entertain granting no action letters to ICOs that are no longer selling tokens. However, if one was expecting the SEC to make firm commitments or provide more definitive guidance they would likely have come away disappointed from the forum.”
Timing, however, is everything, as the management team at Kik, a social media applications firm, is finding out. Two months after the SEC clarified its position on when an ICO token would be considered a “security” under the law, Kik raised $100 million by selling its proprietary “KIN” token, which supposedly would act as the currency on its new social networking platform. CEO Ted Livingston has argued vehemently, obviously to no avail, that KIN should not fall under the auspices of securities regulations.
In its press release, the SEC laid out its basic argument: “Kik had lost money for years on its sole product, and the company’s management predicted internally that it would run out of money in 2017.” Therefore, an ICO at the height of crypto mania in 2017 offered an easy way to obtain much needed capital from unsuspecting investors, who did not have the benefit of full disclosures of the risks involved in the transaction.
According to Steven Peikin, Co-Director of the SEC’s Division of Enforcement: “By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions. Companies do not face a binary choice between innovation and compliance with the federal securities laws.”
Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, added: “Kik told investors they could expect profits from its effort to create a digital ecosystem. Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”
Kik is not the first ICO funded firm in the United States to incur the wrath of the SEC. Two other notable examples, Airfox and Paragon, faced similar accusations of non-compliance, but each firm was able to negotiate with the regulator and reach a settlement. As a result, penalties were assessed, and refunds were eventually made to investors. It now appears that it is Kik’s turn to be in the penalty box.