Messaging App Kik Demand Court Ruling on Classification of ICO
Fast-growing messaging platform, Kik, is heading for a collision course with the U.S. Securities and Exchange Commission (SEC) regarding the classification of its initial coin offering (ICO). In 2017, Kik opted to launch its very own proprietary cryptocurrency token on the public Ethereum blockchain. In September 2017, its token distribution event raised almost $100 million for the platform, with 10,000 people purchasing ‘Kins’ to help pay for digital services such as social media and casual gaming apps.
The token sale helped Kik smash its overall crypto-based crowdfunding target of $125 million. Founder and CEO, Ted Livingston lauded it as the “first mainstream adoption of cryptocurrency” given that many of its younger users may have purchased cryptocurrency tokens for the first time. The $98 million raised from the ICO, combined with the $50 million investment from Chinese tech giant, Tencent, has underpinned Kik’s growth, earning it unicorn status as a $1 billion-valued company.
Currency or unregistered security?
However, the Canada-based messaging app firm could be set for an expensive legal battle after a report from The Wall Street Journal found that Kik’s founder, Ted Livingston, was preparing to fight anticipated enforcement action from the U.S. SEC. That’s because the SEC believes that Kik’s ICO in September 2017 was “an unregistered security”. This claim has been ridiculed and challenged by Livingston, who insists that the Kins work like a currency. He also made note of the Securities Exchange Act 1934, which “explicitly states that the definition of a security ‘shall not include currency’”.
Kik received a notice from SEC stating that the platform had violated securities law, but the company replied questioning the SEC’s motives for “unjustifiably” targeting a company that “made substantial efforts in good faith to comply with all existing laws and regulations when selling Kin in September 2017”. The reply also states that Kik and the Kin Foundation are “prepared to litigate and are confident that they will prevail in court”.
A tipping point for ICOs
The overall number of ICOs released into the crypto wilds has fallen drastically in recent months, with many organizations fearing similar repercussions to those felt by Kik. This potential court battle could have a major bearing on the cryptocurrency industry. Livingston said in a recent Medium blog post that he believed, along with many others, that “this industry needs regulation”. He also went on to say that SEC’s classification of kins as an unregistered security was “not the way to get it”. According to Livingston, “dozens of projects” are at a similar crossroads with the SEC, so there is no doubt that there will be a tipping point for the crypto sector in 2019.
The crypto industry is currently holding its collective breath regarding the future of ICOs. Its destiny rests on SEC staff determining whether or not to recommend to authorize a case against Kik with the SEC commissioners. One argument in Kik’s favor is that the SEC’s chairman, Jay Clayton, admitted in February 2018 that “every ICO [he’s] seen is a security”. Clayton added that he was keen to “go back to separating ICOs and cryptocurrencies”, with a clear vision of “regulating them like we regulate securities offerings”.
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