On October 20, 2020, the SEC and Kik Interactive Inc. resolved a multi-year litigation concerning Kik’s supply and sale of digital tokens known as Kin. The SEC sued Kik, a Canadian firm recognized for its instantaneous messaging program, alleging that the Kin providing ought to have been registered with the SEC. Kik countered that the Kin token was not an providing of securities requiring registration underneath the securities legal guidelines. The case obtained important press protection as a result of Kik was certainly one of only some firms to problem the SEC’s crackdown on preliminary coin choices in federal court docket.
After in depth discovery, the U.S. District Courtroom for the Southern District of New York granted abstract judgment within the SEC’s favor ruling that Kik violated Part 5 of the Securities Act by providing and promoting securities with out a registration assertion or exemption from registration. In ruling for the SEC, the Courtroom centered on the “financial realities” of the transaction at problem. In line with the SEC, the Kin tokens have been securities underneath Supreme Courtroom precedent. The check of whether or not a transaction is an funding contract or safety is whether or not it entails an (1) funding of cash; (2) in a standard enterprise; (3) with the expectation of incomes earnings; and (4) solely from the efforts of the promoter or a 3rd occasion.” The Courtroom dominated within the SEC’s favor, however left it as much as the events to barter a last judgment. The events have proposed a $5-million high-quality and a requirement that Kik inform the SEC about any future transactions involving digital property for a interval of three years. The Courtroom has not but authorized the ultimate phrases of the settlement.
This case, together with comparable enforcement actions, makes clear to digital asset suppliers and purchasers that the SEC and federal courts will scrutinize the underlying economics of those asset gross sales to find out whether or not they adjust to the registration necessities and antifraud provisions of the federal securities legal guidelines.