Breakdown of the SEC's Lawsuit Against Kik
In my last post, I talked about how Kik responded when the staff of the SEC notified Kik that it would recommend the SEC file an enforcement action against them. Since that post, ETHNews uncovered a YouTube video that was uploaded live during a talk that Ted Livingston, CEO of Kik, gave in San Francisco in June 2017.
Kik's Wells Submission
Kik made three arguments to the SEC. One of them was the sale of Kin tokens were not securities under the Howey test because it fails three of the four prongs of the test. In the June 2017 YouTube video, Mr. Livingston, made a few arguments that could weaken Kik's argument.
Some of his statements included:
It’s in Kik's financial best interests to ensure the value of Kin going forward because Kik owns 30% of Kin
Kin will be on the exchanges
Investors will share in the upside of Kin increasing in value: "If Kin were as popular as Ether is today, that 30 percent [of company-held tokens] would be worth 9 billion dollars. That's awesome. We'd give some back to [investors]. You invested $50 million, maybe we'll give you $500 million out of that $9 billion."
Kik initially will have a lot of control and a lot of influence moving the Kin Foundation from centralized to decentralized and it's in Kik’s economic interest to have the token be used in as many places as possible
The Howey Test
In order to win an enforcement action against Kik under the Howey test, the SEC must first prove every single prong of the Howey test to show that the sale of Kin was the sale of securities. To review, the Howey test requires four things:
Investment of money
Expectation of profits
Efforts of others
Kik’s Argues it Fails the Howey Test
Kik argues that it fails the Howey test because
Common enterprise - there is no common enterprise between Kik and the buyers of the tokens because its only job is deliver the tokens to the purchasers.
Expectation of profits - Kik did not lead purchasers to expect profits because they focused their advertising on Kin’s consumptive use and did not make any statements that would cause buyers to think that they could profit. In addition, when asked about exchanges, they remained silent.
Efforts of Others - Even if Kin increased in value, it wouldn’t have been from the efforts of Kik. Rather, it would be dependent on market forces, like a commodity. Further, Kik compared itself to Ethereum, which Director William Hinman of the SEC stated was not a security. Like the Ethereum Foundation, Kik needs to provide the initial efforts to launch the platform and will continue to exert efforts generally. In addition, like Ethereum, the Kin ecosystem has to be sufficiently decentralized to be successful. It cannot succeed based solely on the efforts of Kik.
Applying the Howey Test in Light of Kik’s New Arguments
The courts apply the Howey test in light of the reality of the facts and circumstances surrounding a particular sale. That means, a court will take into account Mr. Livingston’s statements in determining whether the sale of Kin tokens were the sale of securities. Applying his statements to the Howey test would change the results of the test:
Some courts have found a common enterprise where the profits and losses of investor are affected by profits and losses of company. Mr. Livingston admits that it is in Kik’s economic interest for the tokens to be used in as many places as possible and to ensure the value of Kin going forward because they own 30% of the tokens.
If Kin increases in price, both the company and equity investors would benefit: "If Kin were as popular as Ether is today, that 30 percent [of company-held tokens] would be worth 9 billion dollars. That's awesome. We'd give some back to [investors]. You invested $50 million, maybe we'll give you $500 million out of that $9 billion."
Mr. Livingston’s statements as well as the reality of the situation may lead to the finding of a common enterprise.
Expectation of Profits
Kik argues that it only led buyers to expect to use Kin for consumption, but buyers may expect a profit given Mr. Livingston’s statements.
First, he reassures the audience that while Kik cannot guarantee the value of Kin, Kik has an economic interest in ensuring the value of the Kin going forward because they own 30% of Kin.
In addition, he stated that there was a substantial increase in the value of the Kin tokens, they would share with their equity investors. In addition, contrary to Kik's arguments to the SEC, Mr. Livingston states that Kin will be on exchanges.
Efforts of Others
Finally, Mr. Livingston describes the efforts Kik would exert to ensure that the Kin ecosystem is valuable. This includes
using Kik to bootstrap the value of Kin
giving 30% of Kin to the Kik Foundation and exerting influence on the Kin Foundation and
exerting efforts on the Kin ecosystem to get it going and to move it from decentralized to centralized and from not autonomous to autonomous
Given Mr. Livingston’s position, Kik’s argument that the sale of Kin tokens are not securities is weakened. However, it also doesn’t guarantee a win for the SEC.
Here is a more extensive analysis I published in Crowdfund Insider.
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