The United States Securities and Exchange Commission (SEC) today commenced an enforcement action against Waterloo, Ontario-based Kik Interactive Inc. (Kik) for what it alleges is an illegal USD $100 million ICO Initial Coin Offering (ICO).

The SEC alleges that Kik sold the tokens to U.S. investors without first registering their offering and sale as required by the U.S. Securities law.  The SEC is charging Kik under Section 5 of the Securities Act of 1933. The SEC is seeking a permanent injunction, disgorgement plus interest, and a penalty.  The regulator alleges that since the ICO involved securities transactions, Kik was required to comply with the registration requirements of the U.S. securities laws.

In May 2017, Kik, the developer of the Kik Messenger app for smartphones, pivoted to the cryptocurrency space with an ICO of its Kin digital tokens. By the time of the end of the sale in the following September, it had offered and sold one trillion Kin tokens, making it one of the most widely-held cryptocurrencies in the world and had raised $100 million worldwide, with $55 million coming from U.S. investors.  The SEC alleges that Kik had been motivated to do this because it “had lost money for years” on its messenger product.

At the time of the ICO, the Ontario Securities Commission (OSC) took the position that the offering would likely violate Ontario securities law because the tokens were investment contracts and thus, securities. After learning of the OSC’s position, Kik barred Canadians from participating in the offering.

The SEC’s complaint alleges that Kik marketed its tokens as investment opportunities, selling them at a discounted price to wealthy investors. The regulator further alleges that Kik told investors that demand would drive up the value of the token and that the company would help spark this demand by incorporating the tokens into its messenger app, creating a Kin transaction service, and rewarding other companies to adopt its token. At the time, the SEC notes that these services did not exist and there was nothing to purchase with the token.

The SEC alleges that Kik reserved a further three trillion kin tokens for itself, which would immediately trade on secondary markets, and the company would profit alongside investors from the increased demand that it would foster. Finally, the regulator also charges the company told its investors they could expect profits from its efforts to create a digital ecosystem. The expectation of profits based on the efforts of others is a hallmark of a securities offering, according to the SEC.

The announcement from the Securities and Exchange Commission can be downloaded from the SEC’s website.

For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.

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