The Securities and Exchange Commission (SEC) has recently sued Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens.  The regulatory body claims that that Kik sold the tokens to U.S. investors without registering their offer and following the set rules for sale as required by the U.S. securities laws.

Where the Problem Began? 

SEC in its report states that Kik had lost money for years on its sole product, an online messaging application, and the company’s management also predicted internally that it would run out of money in 2017.  To continue with their business, in early 2017, the firm sought to pivot to a new type of business, which it planned to finance through the sale of one trillion digital tokens.

Kik marketed the Kin tokens as an investment opportunity. It was told to investors that rising demand would drive up the value of Kin, and that the company will take up crucial work to spur that demand, by notably incorporating the tokens into its messaging app, creating a new Kin transaction service, and building a system to reward other companies that wish to adopt Kin.  With these promises Kik started its offering sold the tokens. The firm was supposed to keep three trillion tokens and the Kin tokens would immediately trade on secondary markets providing great profit to investor. Now, SEC alleges that these services and systems did not exist and there was nothing to purchase using Kin.

Also Read: Russia’s National Depository Aims to Launch Security Token Blockchain

Allegations Put up by SEC

The Kin offering involved securities transactions, and it was required to comply with the registration requirements of the U.S. securities laws. By selling $100 million in securities without registering the offers or sales, SEC has alleged that Kik deprived investors of information to which they were legally entitled to, and prevented investors from making informed investment decisions.

Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit said “Kik told investors they could expect profits from its effort to create a digital ecosystem. Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”

However, Kik argues that it has continuously attempted to work alongside SEC over the past 18 months and has spent over $5 million while doing so. The company further remains optimistic and hopes that the outcome of the lawsuit will force the SEC to come up with an alternate definition of what is to be considered a security.

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