Canadian startup Kik is in a bit of trouble due to an ongoing investigation by the United States Securities and Exchange Commission. On July 4, the SEC announced that they are going to sue Kik for a $100 million token offering that supposedly sold unregistered securities.
As reported by the SEC, Kik breached the registration conditions, and in particular, Section 5 of the Securities Act of 1933, which states that all offerings have to be registered. The Securities and Exchange Commission wants a permanent injunction and a penalty.
Steven Peikin, co-director of SEC’s Division of Enforcement commented the accusations:
By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions.
Peikin added that “companies do not face a binary choice between innovation and compliance with the federal securities laws” .
The complaint was submitted in the Southern District of New York and specifies that Kik had lost money for years on its one and only product – their online messaging app. As per SEC, with a yearly loss of $30 million, Kik’s management expected to run out of money in 2017.
Robert A. Cohen, chief of the Enforcement Division’s Cyber Unit also shared his thoughts on the matter:
Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.
Cohen thinks that this case should be treated as a securities offering as Kik informed its investors that they could expect income from its intentions to build a digital ecosystem.
At the moment Kin tokens can be traded at half the price they were sold in the beginning of the ICO. Not only did Kik not maintain profitability for their investors, but they exposed them to financial risks. It seems that Kik wanted to raise their capital and appear more attractive to larger tech companies that could eventually buy them out.
Until now Kik’s retaliation consists of launching a crowdfunding campaign which would be used at the time of the lawsuit. The campaign is named DefendCrypto and is aiming to gain $5 million.