Kik’d Below the Belt: Kik vs. SEC Revisited One Month Later

Josh Lawler

When I penned “Kik’s Failure to Back Down has SEC in Catch-22” roughly a month ago, I expected that, despite very favorable facts, Kik had an uphill battle defending against the SEC. I based that expectation on a very well-written response to the SEC’s Wells notice. Kik’s response painted a picture of a functioning company taking every precaution to stay inside the bounds of securities law. The project had enough traction that the parties that would be hurt by SEC action would be the KIN-token-holding public. The stage appeared set for a meaningful test case that might provide some clarity as to the application of the much debated “Howey Test.”

The SEC served Kik with a complaint almost immediately thereafter the publication date of the aforementioned article. The complaint includes a very different set of facts. A set of facts that paints Kik and its CEO, Ted Livingston, in a very different light. A set of facts backed up by evidence that shows that Kik, did not do everything right, that they did not even try to do everything right. . . in fact they appear to have lied fairly egregiously about whether they did everything right.

Witness:

1) Honey Badger Don’t Care. Kik represents in their response to the Wells notice that at the time of the Kik ICO, Kik was running a functional software system in which the KIN tokens were a medium of exchange.What Kik fails to mention is that although they had an existing messaging app, that app did not require tokens at all. In fact, the only reason that Kik decided to offer the KIN tokens is that Kik was running out of money and had dwindling market share. After determining to sell KIN, Kik created an emoji of a cartoon honey badger available to users of the Kik application in exchange for KIN tokens. That’s it. That is what we call pretext folks. Pretty ugly honey badger . . . honey badger don’t care.

2) This is Not an “Investment;” Honey Badgers — — — Their “Gonna be Big.” Kik represents in their response to the Wells notice that they marketed KIN solely for its utility in their messaging application. In what feels like a John Oliver sketch, Ted Livingston is recorded on video at a Bitcoin Meetup in San Francisco on June 28, 2017, speaking in an interview on a stage (in respect to Kin tokens): “people are going to make a lot of money.” He continues, “You know, I think compared to VC investing, for example, one, you can get in at basically any stage and in any amount, and two, you can get out at any stage, and in any amount, and I think that’s really compelling, you know, this idea that I can get in early, identify something that could be big. If I’m right, it can go up in value.” It takes a lot of honey badgers to build real wealth.

3) It’s Hard to Hold a Honey Badger. Kik represents in their response to the Wells notice that they did not, in conjunction with their ICO, tout the instant liquidity available for the KIN token on cryptocurrency exchanges. Actually, Kik told the public in respect of the KIN tokens that since Kin is an ERC-20 token, it would make it easy to liquidate and trade on exchanges[JL1] . From the SEC complaint: “In its May 2017 white paper, Kik stated that it expected Kin to trade on “exchanges” and that Kik’s choice of the ERC-20 token protocol, a specific technical standard on the Ethereum blockchain, would make Kin easy to trade on trading venues operating on the Ethereum blockchain.”[1] Putting aside that an ERC-20 is not automatically easy to liquidate, why would you tell this to someone purchasing a token for the purpose of obtaining honey badger emojis? I guess honey badgers are hard to hold.[2] (Don’t try that at home).

Stop the madness; Bad facts Make Bad Law

Fraud is bad. We can agree on that. The problem is that in dealing with actual fraud, the SEC and certain courts tend to enforce through extreme positions. Accordingly, we now have SEC guidance that participating in a bounty program is an “investment” for Howey Test Purposes.[3] Another example, the Federal District Court for Massachusetts determined that because a token could eventually transform from a security to a commodity, that the CFTC has jurisdiction to prosecute a fraudulently conducted ICO.[4] That means the SEC and CFTC have concurrent jurisdiction over token offerings.[5]

Kik is not a good test case. From what we now know, it appears to be a very bad test case. Unfortunately, unlike Paragon and AirFox, each of which submitted to SEC regulation without reaching court, Kik appears to be dead set on having its day in court. Ted Livingston has said as much, practically taunting the SEC to go after Kik. Now, the SEC gets its chance to establish the Howey Test elements in the context of Kik, complete with Kik’s prostrations that they did everything legally. Based on history, I expect that a court will not only rule against Kik, but also tighten the Howey Test noose around the necks of many projects that otherwise might correctly comply with securities laws notwithstanding a public distribution.[6]

Ted . . . Please stand down. There is more on the line than the continued existence of the honey badger.

You can find the original article “Kik’s Failure to Back Down has SEC in Catch-22” right here.


[1] The SEC’s complaint listed Kik’s May 2017 whitepaper as the reference source.

[2] This article is a reference to the infamous Honey Badger video https://www.youtube.com/watch?v=4r7wHMg5Yjg

[3] August 14, 2018 SEC order in re: Tomahawk and David Thompson Lawrence.

[4] September 26, 2018 Commodity Futures Trading Commission v. My Big Coin Pay, Inc. The fact that this result is even possible illustrates how badly we need statutes written with a focus on digital assets.

[5] The Commodity Exchange Act gives the CFTC extremely broad jurisdiction, such that the SEC and CFTC often do have concurrent jurisdiction; for the most part they have hashed out who should enforce regulations on particular types of transactions. In this case, the SEC has definitely staked a claim on enforcing against unregistered ICOs, but in this case, given the fraud, the court took a very unusual position that effectively invites both administrative bodies to stake the same claim. In general, most tokens should not require much thought in terms of complying with commodities law. I expect confusion will ensue.

[6] Hard to count the different ways that projects try to achieve public token distribution without having any person make an “investment.” Literally it takes a sharp legal mind to figure out how to give the tokens away.

Josh Lawler

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Josh Lawler is a partner at Zuber Lawler whose practice focuses on mergers & acquisitions, securities law and technology transactions.

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