Two weeks ago, Judge Alvin Hellerstein, Federal District Judge of the Southern District of New York, ruled that Kik’s $100,000,000 token distribution event was an illegal issuance of a security — an unregistered securities offering — based upon his analysis of the Howey Test.
It is important to note that Judge Hellerstein’s ruling was on the SEC’s Motion for Summary Judgment, a preliminary action prior to the case being heard. A Motion for Summary Judgment requires there to be little or no disagreement on the facts and thus becomes a matter of the application of only the law.
It would be fair to say that the Judge saw the facts as being agreed by the warring parties and thus was able to opine solely on the law. This rarely happens as there is usually some fact that is in dispute.
This case was a much-watched case and was touted as an important bellwether crypto case.
It is, in reality, a disappointment in its lack of fanfare and grandeur, a yawningly predictable Howey Test case as many — myself included — said from the beginning. Yawn. Sorry.
The United States Securities and Exchange Commission made the noted charge whilst Kik denied that their issuance of “Kin” was an unregistered securities offering.
The parties now have until 20 October 2020 to thrash out some form of an agreement. Stay tuned, amigos.
Understandably, the SEC has the upper hand in this matter whilst Kik is in the unenviable position of negotiating whilst at a huge disadvantage.
You can read the ruling here:
Here is a good explanation of what exactly the Howey Test is:
All of this brings us back to the issue of crypto currency and Kin.
1. You will recall that Kik took an aggressive position on its issuance of its token, Kin. Such is its wont and they had every right to do just that.
Very smart people involved. Excellent legal talent.
2. When it became abundantly clear that the US Securities and Exchange Commission took a different view, Kik was defiant.
3. The way these things work, Kik was notified of the SEC’s discontent directly at an early point in time, and, ultimately, by means of a “Wells Notice” which is a confidential letter that told Kik that the SEC intended to take this matter to court.
4. Kik responded to the SEC’s Wells Notice and then made it public — an unusual act rarely done.
Its response was crafted with the benefit of some of the best counsel on the planet. It did not inspire any great thinking in response.
5. It is important to note that the SEC’s logic was unchanged from its first contact.
It was based on a simple Howey Test analysis, something the SEC has been doing since the middle of the last century.
6. The Judge’s analysis followed the SEC’s. No new ground was broken.
During this process, Kik shut down its core business, attempted to rally the entire crypto community to its cause, attempted to raise money, and took their best shot.
Their best shot was not good enough. The SEC and the Judge shared similar thought processes and conclusions. Again, it was a simple Howey analysis. Nothing more.
The big question is “Why did Kik and all the smart people involved see this in a different way?”
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.
An editorial comment, if I may.
Many saw this case as a bellwether, as noted above. Many of the Crypto Illuminati weighed in, offered opinions, and castigated the SEC. It was a grand thing before the SEC drew their knives.
After this case was joined, but before the Judge ruled in this case, there was another case that was also decided — the Telegram case in which the funds raised were more than $1.8B.
In the Telegram case, the SEC prevailed big time. Telegram was forced to fold its tent, will have to return all the money raised to the investors, and pay a $18,500,000 fine.
There is a long list of other crypto cases that have been settled on terms dictated by the SEC.
Taken together, the Kik case and the Telegram case provide a clear indication of the SEC’s view on these matters and the crypto world would be well advised to embrace that view.
Until something changes via legislation, the SEC is clear as to how they intend to deal with these matters.