A Wednesday ruling by Judge Alvin K. Hellerstein found that defendant Kik Interactive Inc. (Kik) offered and sold securities without a registration statement or exemption therefrom in violation of Section 5 of the Securities Act. In so holding, the court granted the Securities and Exchange Commission’s (SEC) motion for summary judgment and denied Kik’s after the parties had completed fact discovery.
According to the opinion, Kik launched its messaging application, Kik Messenger, in 2010, which enabled user communication in real-time through mobile devices. Though the platform was popular, it was unprofitable because Kik did not sell users’ data to third-party advertisers, the order stated.
To earn money, Kik decided to create a digital currency, “Kin,” and planned to make an initial coin offering (ICO) through the existing Ethereum blockchain, the order said. It made its plans public in May 2017 through various media channels including by blog post, a published white paper, and a multi-city media tour, the order stated. In a pre-sale and through the main public sale, deemed the “token distribution event” held on Sept. 26, 2017, Kik raised nearly $100 million in Kin cryptocurrency, the order explained.
The order reported that in subsequent years, Kin has been widely adopted and currently ranks third among all cryptocurrencies. The SEC filed the present suit in June 2019 alleging that Kik made the offering without first registering in violation of the Securities Act. Kik argued that it was entitled to judgment as a matter of law because of “the undisputed facts, together with decades of case law interpreting the definition of ‘security’ under the Securities Act…”
At the outset of its analysis, the court noted that “prior to Kik’s distribution of Kin, the SEC had not promulgated any rules to regulate issuances of cryptocurrencies.” Because it is a newly regulated area, Judge Hellerstein also noted that he had “to decide this case without benefit of direct precedent in relation to cryptocurrencies.” He explained that his ruling was conditioned on the understanding “that the definition of investment contract is ‘a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.’”
The court held that Kik needed a registration statement in connection with its ICO following application of the tripartite test set forth by United States Supreme Court precedent. Judge Hellerstein then questioned whether an exception applied to Kik’s offering, exempting it from registration. The court held that Kik did not meet the requisite criteria, and instead the pre-sale and public sale “constituted an unregistered offering.”
Finally, the court considered Kik’s argument that the statutory term “investment contract,” was unconstitutionally vague as applied. The court reasoned that “the vagueness inquiry does not call for a factual investigation into whether a statute has led to arbitrary enforcement; it asks, objectively, whether the statute ‘authorizes or even encourages arbitrary and discriminatory enforcement.’” The court held that “the statute at issue here does not.”
The court directed the parties to file a joint proposed judgment for injunctive and monetary relief by Oct. 20. It noted that if they cannot reach agreement, the parties must inform the court of their differences by separate statements in a joint letter due by the same date.
Kik is represented by Cooley and Kirkland & Ellis LLP. The SEC is represented by its own counsel.
