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Seward-and-Kissel

On October 20, 2020, the U.S. District Court for the Southern District of New York entered a final judgment on consent against Kik Interactive, Inc. in the civil enforcement action brought by the Securities and Exchange Commission in connection with Kik’s unregistered offering of its Kin tokens 

The final judgment came less than a month after the court granted the Commission’s motion for summary judgment, holding that undisputed facts in the case established that Kik’s sales of Kin constituted as an unregistered offering of securities that did not qualify for any exemption from registration. The judgment permanently enjoins Kik from violating §§ 5(a) and 5(c) of the Securities Act of 1933 and requires Kik to pay a civil penalty of $5 million. The final judgment further requires Kik, for a period of three years, to provide notice to the Commission before it “participates, directly or indirectly, in an issuance, offer, sale, or transfer” of Kin or any “new cryptocurrency, digital coin, digital token, or similar digital asset issued or transferred using distributed ledger technology.” Case closed, Kik loses, right?

That's certainly not how Kik interprets it. The day after the final judgment was entered against Kik, the Kin Foundation, announced via a blog post entitled, "A New Chapter Begins in the Life of Kin and the Kin Foundation," among other things, that the "cloud of uncertainty" around Kik and Kin had dissipated, that the SEC "has not asked to register Kin as a security, and didn't impose trading restrictions on it." Except, the whole point of the Commission's enforcement action, which it won, was that Kin could not be traded unless it was registered with the Commission or exempt from registration, which it was not. 

The blog post continued: "The judge's ruling in the case and the terms of the settlement make it clear that the Kin cryptocurrency is not in violation of any securities law and should be free to trade on exchanges." Which is a curious statement given that the court held just the opposite. Kik or the Kin Foundation may be trying to draw a distinction between the offer and sale of Kin and the Kin token itself. However, the court's opinion and order granting the Commission's motion for summary judgment refers to Kin tokens themselves as securities, holding that purchasers in both the pre-sale and the sale of Kin to the public "received the same class of securities, fungible Kin..." 

It remains to be seen how Kik's interpretation of the final judgment (and any actions Kik or the Kin Foundation take) will sit with the Commission staff. Stay tuned.

LEGAL TOKENS

The notice provision in the judgment is interesting. On the one hand it could be helpful to Kik, providing a safe avenue of sorts for the use, further distribution, or exchange listing of Kin. At some future date, Kik could give notice of its intention to transact in Kin or list it on an exchange, and if the Commission staff does not object, Kin could go about its business under the aegis of the regulator’s non-objection. Presumably that future date will come when the Kin ecosystem has developed more fully and become sufficiently decentralized such that transactions in Kin would, in the Commission’s view, no longer be deemed securities transactions. On the other hand, the notice provision gives the Commission the opportunity, when the time comes, to determine whether Kin, as a digital asset, is no longer a security. It does not want to leave that judgment to Kik. Kik, in the Commission’s view (not to mention the court’s) has already demonstrated it does not have the greatest judgment in that regard.  

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Author's Assets

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Philip Moustakis | Counsel

A former senior counsel in the SEC’s Division of Enforcement, Philip advises companies and individuals at Seward & Kissel on cryptocurrencies and blockchain technology, SEC enforcement matters, other regulatory investigations, and internal investigations. As a founding member of the SEC’s Cyber Unit, Philip advised the Commission on cryptocurrencies and investigated matters involving initial coin offerings (ICOs), unlawful touting of ICOs, and other violations of the federal securities laws related to cryptocurrencies. Publicly filed enforcement matters Philip spearheaded included the SEC’s first ever Bitcoin-related enforcement action against the operator of Bitcoin Savings & Trust, a Bitcoin-denominated Ponzi scheme, settled proceedings against an operator of a Bitcoin-related social media marketing venture and a popular Bitcoin betting site for the offer and sale of unregistered securities, and settled proceedings against an operator of unregistered cryptocurrency-denominated securities exchanges and broker-dealers.

“The SEC is a principles based regulator, and it will assert its jurisdiction over any securities offering or transaction, as it has done since the onset of the ICO craze, regardless of the technology used to facilitate such an offering.”

Philip’s thoughts on the recent SEC enforcement action against Kik Interactive, Inc. as published in the Crowdfund Insider article “Former SEC Senior Counsel Comments on Kik Ruling: Kik Could Have Benefited From Traditional Capital Markets Lawyer”