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SEC sues Kik over $100 million cryptocoin offering

The company sold a trillion coins in 2017.

kikpromo.jpg

Kik is in trouble with the government. 

Photo by James Martin/CNET

Kik, the instant messaging service, jumped on the cryptocurrency bandwagon in 2017 when it released its own cryptocoin. It's now experiencing the effects of not getting permission from the US government.

The US Securities and Exchange Commission is suing Kik for selling its own coin, called Kin, to investors in 2017 without registering with the agency, the SEC said Tuesday in a statement. The Canada-based company raised $100 million, which according to the SEC, violates registration requirements in the Securities Act of 1933.

"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," Steven Peikin, co-director of the SEC's division of enforcement, said in the statement. "Companies do not face a binary choice between innovation and compliance with federal securities laws."

Kik CEO Ted Livingston has been planning for the suit since it received notice in January of possible legal action. 

"We have been expecting this for quite some time, and we welcome the opportunity to fight for the future of crypto in the United States," Livingston said in a statement Tuesday. "The SEC's complaint against Kik also presents a highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event. We look forward to presenting the full story in court."

According to The Wall Street Journal, Livingston said the coin was not a security but instead used as a "utility token" for developers. The company started a defense fund called Defend Crypto and raised more than $4 million. 

The SEC said Kik pushed its Kin coin as an investment opportunity and sold 1 trillion coins. The SEC also said Kik told investors the cryptocoin would increase in value, be used for a transaction service within the messaging service and be part of a reward system for companies that adopted the token. "At the time Kik offered and sold the tokens, the SEC alleges these services and systems did not exist and there was nothing to purchase using Kin," the SEC said.

Kik general counsel Eileen Lyon said the SEC's lawsuit is based on "flawed legal theory" and won't withstand judicial scrutiny. 

"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," Lyon said in a statement. 

The SEC didn't immediately reply to a request for comment.

Originally published on June 4.
Update, June 5: Adds quotes from Kik CEO and general counsel.