US SEC vs Kik Interactive case: Case study

Detailed analysis of the SEC vs Kik Interactive case
  • The SEC vs Kik Interactive case has been terminated in will of the SEC’s motion for summary judgement
  • Judge Alvin Hellerstein used the Howey Test to conclude the proceedings
  • Kik will have to pay a fine of $5 million, which is not a big some for the firm

After a long journey, the judgement of the Kik Interactive case concluded with Judge Alvin Hellerstein ruling in favour of the US Securities and Exchange Commission’s (SEC’s) motion for summary judgement in SEC v. Kik Interactive. According to the judgement, the social media firm had violated the federal securities laws by selling contractual rights to acquire Kin tokens. And the court also mentioned that by issuing and selling Kin tokens, the firm has also violated the laws. 

The case, which started in June 2019, by the US SEC has seen many twists and turns. The SEC allegedly filed an enforcement action against the Kik Interactive case Incorporation, a social media firm. Following the filed documents, we observed that back in September 2017, the social media firm used SAFT to introduce its Kin crypto tokens. 

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In the complaint, the regulatory claimed that the offering of SAFTs by Kik in 2017 was an unregistered move. Not only unregistered, but the SEC also mentioned that the offerings were the non-exempt sale of securities which involves a single planned distribution, that needs to be viewed as a part of Kin sale. 

The case involved two phases, as the pre-sale of contractual rights and the sale of Kin tokens in its token distribution event. Following the two phases, back in late September 2020, Judge Hellerstein of the South District of New York stated that both phases are intertwined, and both were part of a single plan of financing having a single purpose. The judge concluded that the phases constituted an unregistered offering of securities that don’t qualify for the exemption.

Howey test was used to clarify the sale of the token

To analyse whether the sale of Kin tokens was security, the judge applied the Howey test. It is observed that the judge seemed significantly influenced by the social media firm’s promotional efforts extolling the profit-potential of the token, the lack of consumptive uses available as of the launch, and references to the range of activities anticipated by Kik Interactive case. Such factors would also support the growth of the Kin ecosystem, along with the value of the token. 

However, the judge wasn’t convinced with the minimum functionality, like a wallet’s existence and the ability to send and receive premium stickers, and achieve and view the status. And also was not convinced with the prominent disclaimers of any contractual obligation for Kik to support Kin or its ecosystem. On the other hand, the judge also didn’t consider the extent to which the fifty-seven Kin applications were developed by individuals other than Kik. 

How does the judge conclude the case regarding SEC vs Kik Interactive?

Judge Hellerstein looked to conventional integration doctrine and required consideration of five factors. Firstly, the judge questioned whether there is a single plan of financing. Secondly, if the sales involve the issuance of the same class of securities, do the tokens’ sales be made at about the same time. Fourth, whether any same type of consideration is received. And finally, whether the sales were made for the same general purpose.

The judge observed that there was a single plan of financing for the general purpose. Considering the timing, it was found that the TDE started a day after the pre-sale. Indeed, following all the proceeds, it was observed that everything went in support of the Kik Interactive case or the Kin ecosystem. The shortage of time-related separation is hard to deny when several factors could have weighed against the conclusion. Indeed, the judge mentioned that Kik’s minimum functionality should not be supported by funds raised in the second phase.

The two phases eventually did not receive the same class of securities. It is found that the first phase was the contractual right, whereas the second was the crypto token. Following the aforementioned fact, the judge ruled that both phases were ultimately the same security owner, though the facts couldn’t compel the result. On the other side, the judge also acknowledged that different considerations were received in the offerings’ two phases. Overall, he decided this was insufficient to change his conclusion.

What does the judge conclude at the end?

The judgement entered based on the settlement enjoins the social media firm, its agents, and active participants in the original distribution. At first, the court prohibited all such involved individuals from engaging in sales of such unregistered securities. Secondly, the firm will have to give the Commission 45 day’s notice regarding any planned sale or transfer of the tokens for the next three years. For concluding, the firm will have to pay a fine of $5 million, which is relatively minor. Overall, Kik can continue its operations, and the Kin network did not have to shut down. Moreover, the firm was not required to register the crypto token with the US SEC for moving forward.

The US SEC is not found supporting crypto industry

After the conclusion of the case, the US SEC found going to take the position that Kin is still securities. However, the language is still significantly incomprehensible for the users in the cryptosphere. Indeed, it is also observed that, since the order was entered, the SEC has never made any public move against the Kin ecosystem. Following the regulatory doings, it is clear that it is not in support of crypto entrepreneurship. The aforementioned fact is proved after observing the recent lawsuit case filed against the native token of the world’s largest fintech firm.

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Ahtesham Anis
Ahtesham Anis is a Computer Science undergrad student currently based out of India. Coming from the business background and his keen interest in Cryptocurrency and Blockchain technology is what Ahtesham brings to the table. He is always an eager learner when it comes to exploring the new technologies and topics in the crypto world.

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