Last week the Securities and Exchange Commission filed a lawsuit against messaging platform Kik claiming that it illegally raised $100M through a token sale in 2017. This stems from the SEC’s guidance that any token offering that checks all the boxes of the Howey Test qualifies as a security and cannot raise money from retail investors unless the offering is registered with the SEC and appropriate disclosures are made.
Kik has stayed adamant that its offering does not qualify as a security:
For the reasons set forth in our Wells Submission, the SEC’s complaint against Kik is based on a flawed legal theory. Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a ‘common enterprise’; and that any contributions by a seller or promoter are necessarily the “essential” managerial or entrepreneurial efforts required to create an investment contract. These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny.Kik’s offical response per PR Newswire
The SEC’s move to bring this case to court has set the stage for an incredibly important legal battle that could have significant ramifications for the crypto ecosystem. As part of its efforts, Kik launched a crowdfunding site called DefendCrypto.org and has been trying to rally the ecosystem to stand with them and donate to the cause.
I’ve found it really interesting that many people, including folks in the crypto industry, have come out attacking Kik – seemingly hoping that the SEC hammer drops on them to the fullest extent. While Kik’s efforts are surely first and foremost self-serving, one must not lose sight of the fact that Kik’s battle is in fact the rest of the crypto industry’s battle. In my opinion, Kik’s token (KIN) is not a security – it is a cryptocurrency meant to be used within Kik’s ecosystem that facilitates the company’s ambition of building a one-stop shop platform (similar to WeChat) built on cryptonetwork payment rails. Its token also serves as a way for the company to bootstrap its network – the fact that it is a free-float currency that rewards early adopters (who buy cheap) is where I think the SEC’s ears perk up. While this does invite speculators to come in, this mechanism creates a dynamic where an early adopter of a network, no matter where in the world they are or what their accreditation status is, can benefit financially from its growth and in turn be incentivized to help it grow – essentially acting as a “part owner” of it.
Skirmishes between legit Crypto teams (not the scammers) and the SEC have been popping up left and right ever since they seemingly choked off ICOs and for good reason – they’ve been late to react to the decentralized dynamics under which crypto operates and they continue to try to apply laws and frameworks to crypto that were created for equity in centralized companies – in other words, they need to be adjusted for this new paradigm that crypto assets present in order to fulfill the spirit of the law, which is to protect consumers and facilitate capital formation (a key ingredient for innovation). However, I do empathize with the SEC – they do not want to implement new laws/frameworks in a nascent ecosystem that is still evolving – imagine if they came out with new guidance that had to be rolled back a year or two later due to significant changes in cryptonetworks and how they operate. In the end, it is a fine line – the SEC cannot act too quickly, but they must provide proper and fair guidance at some point, otherwise the US will miss out on a significant portion of Web 3.0 innovation.
I really hope rational heads prevail and that the SEC realizes that legit crypto assets should not be subject to the antiquated Howey Test. I hope they make the necessary adjustments to come up with a new framework that is more suitable to this asset class in order to promote the kind of innovation that will let blockchain technology reach its potential.