Kik says SEC’s charges are based on “flawed legal theory”

By Ben Munster

Earlier today, the US Securities and Exchange Commission sued messaging app Kik for failing to register what the regulators say was a $100 million securities offering. The Commission claimed that Kik had pushed the token sale as a speculative investment, and had engineered a “pivot” to the cryptocurrency as a pretext to salvage its ailing business.

Now Kik, which has set up a $5 million fundraiser to support its legal fight, has issued its response.

Kik General Counsel Eileen Lyon wrote in a press release sent late Tuesday that the SEC’s complaint was based on a “flawed legal theory” that relied on an incorrect understanding of securities laws. The SEC alleges that Kik executives had internally characterized the Kin token as a vehicle for speculative gains, qualifying it as a security.   

“The complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a ‘common enterprise’; and that any contributions by a seller or promoter are necessarily the ‘essential’ managerial or entrepreneurial efforts required to create an investment contract,” wrote Lyon.

She added: “These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny.”

Lyon argued that the SEC, by only naming Kik in its suit—while ignoring the Kin Foundation, which was addressed by the SEC in the original notice—had tacitly acknowledged “that the transactions currently taking place within the Kin Ecosystem do not fall under the federal securities laws.”

The Kin Foundation, an independent non-profit, oversees the development of the Kin token.

Kik CEO Ted Livingston, meanwhile, described the SEC’s complaint as incomplete, saying that it presents a “grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event.”

“We have been expecting this for quite some time, and we welcome the opportunity to fight for the future of crypto in the United States,” he added. “We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps.”

He also said that the Kin “ecosystem” was growing strong, with little sign of abating, throwing into doubt the Commission’s characterization of the token as a security. “Kin is being used by more people in more apps every day, and come trial, Kin may be the most widely used cryptocurrency in the world,” he said.

“While the SEC’s actions are a challenge to overcome, they won’t affect the use, transferability and characterization of Kin, and we expect momentum in the Kin Ecosystem to only continue to grow,” he added.

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