Epic litigation! For the first time, the SEC sued KIK for illegal ICO sales on the grounds of “unregistered”. What does the lawyer think?

SEC official website news, on June 4, the US Securities and Exchange Commission (SEC) filed a lawsuit against Canadian instant messaging software company Kik, saying that the company carried out illegal ICO in 2017 and sold 100 million US dollars to US investors, but not Registered in accordance with Chapter 5 of the US Securities Act of 1933.

The SEC said that Kik has been losing money on its only product, the online messaging application, for many years, and the company's management internally predicted it would run out of funds in 2017. Therefore, in early 2017, the company tried to fund the company by selling one trillion digital tokens. Kik sells "Kin" tokens to the public and sells them to wealthy buyers at discounted prices, raising more than $55 million from US investors. The price of the Kin token traded recently was about half of the value paid by the public investor.

The SEC also said that Kik told investors that "increased demand will push up the value of kin" when selling Kin tokens, and said "kin will trade in the secondary market in the future" and "Kik will work with investors from it." The increase in demand is profitable.” Kik claims that kin will be used in his online messaging application, but at the time “kik claimed that these services and systems did not exist, nothing could be purchased using kin”.

It is reported that the top three ICO projects that the US SEC is concerned with are EOS, Kik and tezos. The SEC and Kik negotiations have been pulling for two years and finally broke down in recent days. A week ago, Kik just declared war on the SEC and launched the DefendCrypto fund to sue the SEC. Now the SEC has also countered and filed a lawsuit against Kik. It is worth noting that this seems to be the first time the SEC has filed a lawsuit against a company for “not registered as required”.

Epic litigation, two years of negotiations broke down

In September 2017, Kik issued the token Kin on the Ethereum. On the third day of the issue, he received a warning from the SEC that Kik sold Kin without obtaining the right to issue securities, in violation of the securities laws.

Since then, whether kin is a "securities", kik and the SEC have been engaged in a two-year debate.

On November 16, 2018, the SEC asked Kik to submit a Howey test report and stated that it would enforce a lawsuit against Kik in the next six months.

The Howey test is an effective means of determining whether a financial instrument is a "securities". It mainly consists of four conditions: (1) using money to invest; (2) investing with a common enterprise; and (3) expecting to make a profit for itself; 4) Only due to the efforts of the sponsor or a third party.

In March of this year, Kik submitted a Howey test report to the SEC, giving Kin a specific reason for the currency is not a security, mainly including: 50% of the token sales participants bought less than 1000 US dollars; Kik built a wide range of encouragement The way to participate in Kin and prevent speculation; it delayed the sale of tokens, and the use of Kin has increased since the sale of tokens. Therefore, Kik believes that kin is not a securities and is not regulated by the SEC, but these reasons are not enough to convince the SEC.

On May 28 this year, Kik declared war on the SEC. It launched the DefendCrypto fund and raised $5.17 million in four days. The sole purpose of the fund was to sue the SEC. The fund also received joint responses from a number of industry companies including Circle, ShaPeShift, and Messari, all of which have been warned by the SEC.

In June, it was the deadline for the SEC to enforce compulsory proceedings against Kik. As expected, the SEC finally took the shot.

“This is an expectation. The issue of compliance and transaction compliance is an inevitable trend in the development of the industry. It should be easy to trade and compliance in the actual implementation of the legal basis. The scaled funds only solve the issue and transaction compliance. After the transformation, it has a sustainable inflow foundation. The work in this direction has to go to the United States. Compared with the STO field in 2017, the regulatory structure of 2019 is clearer, but the regulatory orientation has not changed." Huang Haiguang, founder of the wooden house capital, said.

Frequently dispatched to ICO, the US regulatory logic becomes clearer

Since 2017, US regulators have been closely watching the movements of ICOs and virtual currencies, especially the SEC's frequent attempts to include securities tokens in regulatory areas.

On December 11, 2017, SEC Chairman Jay Clayton publicly issued a personal statement, "Statement on Encrypted Digital Currency and ICO," warning him that it would only be named "tokens" or that it would not be sufficiently purchasing power to exclude it from securities. In addition, as long as these tokens are able to generate potential revenue based on third-party business activities, they have securities attributes.

In the United States to issue ICO, first through the Howey test, determine the token property, commodity pass or securities pass, and thus into the corresponding regulatory system. If it is defined as “securities”, it must be included in the SEC regulation, and its associated ICO and trading platform need to be registered under the Securities Law.

In terms of ICO registration requirements, in February 2018, the United States held two congressional hearings on the blockchain. The SEC Chairman pointed out that the unregistered ICO was illegal and denied that it had approved and approved the ICO. After that, some virtual currency exchanges in the United States have taken action. Coinbase announced in June 2018 that it will register with the SEC as a broker-dealer. If licensed, Coinbase will operate under the supervision of the SEC and FINRA, but still No news.

The SEC was not the first to file a lawsuit against the ICO project, but it was mostly around anti-fraud and misrepresentation, such as the September 2017 allegations against REcoin and DRC. Or a subpoena surrounding information disclosure. For example, starting in March 2018, the SEC began sending subpoenas to more than 80 companies and individuals involved in ICO, asking them to provide specific details of the ICO structure. This seems to be the first time the SEC has File a lawsuit against a company on the grounds of registration.

Lawyer's point of view: Kik is very passive at present

In response to this incident, Babbitt interviewed Gao Kang, a lawyer at Beijing Tianchi Juntai Law Firm. He said that there is no room for choice between innovation and compliance with the law. Kik is currently passive.

Gao Kang lawyer: The US Securities and Exchange Commission (SEC) sued KIK for unregistered securities sales when it launched ICO in 2017 on the grounds that it violated the US Securities Act of 1933 on securities sales registration. Mandatory regulations.

First of all, what I want to say is that the United States is a country with a legal system. Everything must be taught. Article 5 of the US Securities Act of 1933 states that any securities or carriers with similar nature of securities must be registered for sale. In a real legal state, there is no room for choice between any entity and innovation and compliance.

Second, the key point of the current incident is the qualitative question of the issuing currency of Kik. Whether the currency issued by Kik is a carrier of securities or similar securities as stipulated in Article 5 of the Securities Act of 1933. This is also the focus of Kik's defense. Because it is not illegal for the lawyer to sell random digital tokens online. However, part of the problem is the way Kik sells the deal to investors. Kik is said to have sold tokens to investors, telling investors that they can expect to profit from the effort to create a digital ecosystem. If the digital tokens of Kik function like securities, then these digital token sales may be considered as unregistered securities sales, which is why the US Securities and Exchange Commission is accused today.

I am not surprised that the US government has sued Kik. Kik is currently passive. How Kik is responding to the SEC's lawsuit in court and looking for a reasonable solution is worth looking forward to. Here I also want to remind companies or individuals engaged in digital cryptocurrencies. Any innovative activities must be carried out within the framework of the law. If necessary, you must consult with a lawyer to avoid unnecessary trouble.