U.S. District Court Judge Grants SEC’s Motion for Summary Judgment
The U.S. Securities and Exchange Commission (SEC) has won a significant legal victory against Kik Interactive after alleging that the Kin digital tokens constituted unregistered securities under federal law.
The ruling, issued by U.S. District Judge Alvin Hellerstein, followed more than six months of consideration after both parties filed motions for summary judgment seeking to resolve the case without a trial. With this decision, the civil case moves closer to the sanctions phase and a likely final resolution.
Kik, a Canada-based company known for its eponymous messaging app, developed the Kin cryptocurrency as a means to monetize app usage.
Between June and September 2017, Kik carried out a private presale of Kin tokens, raising $50 million from 50 investors. Under the terms of the Simple Agreement for Future Tokens (SAFT), investors purchased tokens at a discount and explicitly acknowledged that they were buying an asset with value.
In September 2017, Kik proceeded with a public token sale that raised an additional $49.2 million.
At the time Kin was announced, the SEC had not yet issued comprehensive rules governing cryptocurrencies like Kin. The agency’s DAO Report, which offered preliminary guidance on when token offerings might be treated as securities, was released in July 2017, coinciding with Kik’s token sale.
Two years later, the SEC charged the Canadian company with violating Section 5 of the Securities Act by offering and selling securities in the United States without proper registration.
Although the judge noted the absence of direct precedent in some aspects of the case, he sided with the SEC. The dispute centered on whether the token sales met the Howey test, a nearly century-old standard used to determine whether an instrument qualifies as an investment contract—and therefore a security.
The Howey test requires an investment of money in a common enterprise with a reasonable expectation of profits to be derived primarily from the efforts of others.
Both parties agreed that purchasers invested money, but they disagreed on the remaining elements of the test.
Judge Hellerstein concluded that Kik had established a common enterprise and that purchasers had a reasonable expectation of profit.
“In public statements and promotional events for Kin, Kik praised Kin’s profit potential. Kik’s CEO explained how supply and demand would drive Kin’s value,” the judge wrote.
The order directs that by October 20, “the parties shall jointly submit a proposed judgment for injunctive relief and monetary relief.”