Messaging giant Kik has been embattled in a fierce exchange with the United States Securities and Exchange Commission (SEC) over the last year for a token fundraising run in late 2017. The latest news, confirmed by Kik CEO Ted Livingston, reports that the firm will shut down the Kik app and reduce its staff down to around 10% of the current headcount. According to Livingston, this move is a direct result of the SEC Lawsuit as the company is being drained of its funds.
History of the Lawsuit
Kik ran an Initial Coin Offering (ICO) in Sept 2017, raising almost $100 million for its subsidiary Kin by offering Kin tokens as a cryptocurrency. Although it was seen as one of the most successful token sales for the year, it only took four months before rumors started coming in regarding SEC investigations into the token.
The first half of 2018 saw the SEC issue nine subpoenas followed by nine testimonies in the latter part of the year. This all came to a head in November when Kik was issued with a Wells notice, stating that enforcement action would begin against the company.
According to the Wells Notice sent by the SEC, the violations revolved around Sections 5(a) and 5(c) of the 1993 Securities Act, prohibiting the sale of securities which haven’t been registered with the commission.
Kik openly and emphatically refuted any wrongdoing, sending in a 30-page letter in response to the Wells Notice. The letter was so confident that the response closed with, “Should the Commission choose to file an enforcement action, Kik and the Kin Foundation are prepared to litigate and are confident they will prevail in court.”
As a result of the statemate, negotiations took place until early 2019, with the SEC requesting additional documents and information from Kik. In a report published on May 16, it was revealed that these ongoing negotiations had cost Kik over $5 million. The primary driver in the push back by Kik is the lack of clarity provided by the SEC. Later that month, Livingstone revealed in a podcast the launch of the Defend Crypto Fund set up to fund the ongoing battle:
“And after spending 18 months and over $5 million trying to work with them, we just continue to be super frustrated by the lack of clarity [...] and so we’ve put together defendcrypto.org, and what that's saying is that the only way we're going to get clarity is if somebody goes to court, and so we are prepared to do that.”
The fund has received over $1.6 million in contributions, which can be sent in 19 different cryptocurrencies, including all the major ones such as BTC, ETH, LTC and XRP. All funds are held in wallets by Coinbase. Currently, the website lists the main advocates for this fund as Kin, Shapeshift, Messari, Arrington Capital, Fight for the Future, and the Blockchain Association, who oversees all spending of the funds.
According to the Fund website, Kik have already spent $6 million to date and has committed another $5 million to bring regularity clarity to the Blockchain Industry. This initiative from Kik has received influential backing on twitter from the likes of Anthony Pompliano:
“Looks like they are going to take on regulators in court to create a Howey test for crypto. Things are about to get very interesting.”
Some companies like the financial service company, Circle and a crypto exchange Polioniex openly supported the program:
“We’ve been vocal about the need for regulatory clarity so crypto can flourish in the United States and fortunately we’re not alone in this fight. Circle & @Poloniex support and applaud @kin_foundation’s effort’s to #defendcrypto”
Some lawyers see this case as a defining moment for cryptocurrency regulation worldwide. Dave McGill from Kobre & Kim Law firm, told Cointelegraph:
“In terms of the pace of the litigation, this is one reason why KIK built a war chest on the front end of the dispute. KIK understood that this would be a protracted battle, and judging by the 130-page, earth-scorching Answer that it filed in response to the SEC complaint, KIK intends to attack the integrity of the SEC’s investigation every step of the way.”
Securities and Corporate Lawyer Samuel Katz also took to Twitter to voice his opinion on the matter. Although he was not convinced the case was winnable, he felt the push for regularity clarity was extremely important:
“I’m not a litigator, but having read Kin’s excellent response to the Wells notice, I’m still not sure it’s a winnable case [...] Spending $5m on a bandage that might not even work seems like a big waste to me. The US needs to lead on this and resolving this by trying to keep tokens outside of the law seems futile as investor and consumer protection are very strong values in the US [...] It’s easy to get behind the #defendcrypto movement to counter the SEC’s approach thus far, but it’s not going to provide the long-term solution needed.”
Not all the feedback was positive, with some people calling this a money-grab by Kin, or the wrong approach and just a “bandaid.” Popular crypto Twitter influencer David Gokhshtein posted a video explaining that Kik had more than enough money to fund this battle and the Defend Crypto Fund may be fueled by motives other than bringing the community together to fight an injustice.
The latest report from the case came during a court filing on Aug. 6, in which Kik’s lawyers claimed the SEC took quotes out of context and manipulated facts in order to support their allegations. The filing claims that the allegations against Kik are not supported by strong evidence and the SEC has subsequently resorted to misrepresenting the facts:
“Instead, the Commission’s Complaint reflects a consistent effort to twist the facts by removing quotes from their context and misrepresenting the documents and testimony that the Commission gathered in its investigation.”
Kik takes the battle to the next level
The latest news caused a large stir in both the cryptocurrency and Kik communities, with the announcement that Kik will shut down their messaging app and lay off up to 80% of staff in an effort to continue legal battles with the SEC. The drastic action was a direct result of the ongoing legal battle, Livingstone explained in his blog post:
“Together these changes will drop our burn rate by eighty five percent, putting us in a position to get through the SEC trial with the resources we have.”
The blog post goes on to explain how the company will proceed and outlines all the changes to occur, starting with the shutdown of the Kik app. Kik currently employs over 100 people, 70 of whom already having received notices for termination of employment. In an effort to manage resources in its legal case with the SEC, the company will decrease to a barebones “elite” team of employees. This team will focus on the conversion of Kin users into Kin buyers.
There is mention of the team’s attempt to minimize the impact on employees by offering each person a role in a company like Kik. There is very little information about who this company is, if the roles will be the same, or if there is any relation between this new company and Kik.
In Livingstone’s personal blog post, he emphasized his confidence that the Kin infrastructure is already an unstoppable force that even the SEC has no authority over, “But no matter what happens to Kik, Kin is here to stay.” Livingstone finished the post with his promise to continue growing the Kin ecosystem that will be used by billions of people.
Although this has taken a toll on the Kin ecosystem, there are roughly 60 apps that still use the token according to Livingstone. In regards to the closure of Kik, Ben Sauter from Kobre & Kim Law told Cointelegraph that the consequences far outweigh the actions:
“One thing Kik’s closure highlights is the collateral damage of the SEC’s regulation-by-enforcement mentality. This isn’t a fraud case; it’s just a question of whether securities were properly registered. Yet the company is now being forced to shut down a popular app and lay off many entrepreneurs. That’s a pretty drastic result.”
Kik is hoping to bring this case to trial as soon as May 2020, but there is expected pushback from the SEC. In a report from Global News on Sept. 25, Kik CEO Ted Livingstone spoke to the audience at Elevate Conference in Toronto:
“We have to keep going. Until that’s it, we don’t have a dollar left, a person left. We will keep going no matter how hard it is.”
This post received quite a strong response from the crypto community, with many negative responses criticizing the closure of Kik as a move that will kill Kin. On Twitter, the official Kik official is surprisingly yet to make an announcement, while the Kin account simply shared the post without any mention of the closure. This didn’t stop users from reaching out to Kik’s Twitter to give their opinion on the move, mostly positive with one user even asking for a Kickstarter to save the Kik app.
The Kik app page also received some responses that the app was rife with adult content and needed a change regardless of the situation. This stemmed back to September 2018, where a BBC investigation found 1,100 cases of child sexual abuse involving the Kik app.
This case stands to be a foundation that future regulations may be built upon, not just in the U.S. but globally. Regardless of the outcome, the wider community hopes that this will improve the regulatory clarity authorities around the world will provide and emphasize the importance of working with industry leaders for a more inclusive environment.