U.S. Securities and Exchange Commission v. Kik Interactive, Inc., No. 19-cv-5244 (S.D.N.Y. filed on June 4, 2019)

On June 4, 2019, the SEC filed an enforcement action in the U.S. District Court for the Southern District of New York against Kik Interactive, Inc. (“Kik”) for violation of Sections 5(a) and 5(c) of the Securities Act for the sale of unregistered securities. The SEC seeks a permanent injunction, disgorgement of all “ill-gotten gains or unjust enrichment” (with pre-judgment interest), and a monetary penalty.

Kik is a company that owned and developed an online messaging platform called Kik Messenger. In late 2016 and early 2017, Kik’s more traditional sources of investment and venture capital funding allegedly dwindled and Kik allegedly faced the prospect of running out of cash to fund operations by the end of 2017. Kik allegedly decided to “pivot” to an entirely new and speculative business – selling tokens called “Kin.” Kik allegedly conducted an ICO in early 2017 in which it sold more than US $55 million worth of Kin. Including subsequent sales, Kik allegedly sold one trillion Kin and raised proceeds worth approximately US $100 million without registration under the Securities Act or the Exchange Act. At the time of filing, Kin allegedly traded on unregulated trading platforms at approximately half of the ICO value.

Applying the test set forth in SEC v. W.J. Howey Co., the SEC alleged that Kin were unregistered securities because: (1) Kik marketed Kin as an investment opportunity; (2) Kik promised to increase Kin’s price through its efforts; (3) Kik repeatedly emphasized its own experience and resources as key to establishing and increasing Kin’s value; and (4) a Kik consultant warned that the “Kin offering” was potentially an offering of securities that required registration with the SEC.

Kik filed its answer to the SEC’s complaint on August 7, 2019. Kik stated that the complaint “badly mischaracterizes the totality of the facts and circumstances leading up to Kik’s sale of Kin” and “reflects a consistent effort to twist the facts by removing quotes from their context and misrepresenting the documents and testimony” produced to the SEC during its investigation. The parties have commenced discovery.

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