SEC to Urge Court to Speed Up Kik ICO Trial

In the court, SEC stated that Kik Interactive did not provide adequate arguments why KIN tokens were not registered as securities 
24 March 2020   233

The US Securities and Exchange Commission (SEC) called on the court to expedite the proceedings against the Canadian company Kik Interactive, accused of conducting an unregistered ICO.

In an appeal to the District Court of the Southern District of New York, the SEC stated that Kik Interactive did not provide adequate arguments why KIN tokens were not registered as securities. Recall that in 2017, Kik held an initial token offering (ICO), which attracted about $ 100 million.

The agency claims that Kik sold tokens to investors, promising them profits as the ecosystem expanded, which is considered a key characteristic of the securities offer. In its application, the SEC quoted Kik CEO Ted Livingstone saying that “the price of a KIN token is likely to increase in value.” Such an “investment scheme”, according to federal laws, makes a token a security.

According to Kik, the pre-sale tokens were intended exclusively for accredited investors to raise funds for the development of the KIN ecosystem. Then, a public sale of tokens was conducted, aimed at ordinary users. However, the regulator refutes these arguments, since the startup did not present any differences, how these two rounds of sales differed from each other. In addition, restrictions on the sale of KIN tokens on the open market did not apply to accredited investors.

Despite Kik’s statements that the ICO was outside the Commission’s authority, the agency is convinced that the tokens were sold to US citizens. Kik assures that it has fulfilled all the requirements necessary for the legitimate attraction of funds, namely, before conducting a pre-sale, it filled out a special form, exempting from the need to register with the SEC.

Regarding open sales, Kik denies having any contractual obligations or promises to investors. Kik management claims that according to the definitions of the Commodity Futures Trading Commission (CFTC) and the United States Internal Revenue Service (IRS), KIN tokens are not securities, but consumer goods. Moreover, Kik believes that the SEC is asking the court to expand its powers without understanding the status of KIN tokens and key aspects of their sale.

Court to Ban TON Tokens Release

U.S. District Judge P. Kevin Castel, of the Southern District of New York issued a temporary restiction, therefore supporing the SEC
25 March 2020   286

The American court issued an order to the developer of the Telegram messenger, according to which he should refrain from the distribution of tokens of the TON blockchain project planned for next month.

According to CoinDesk, on March 24, the District Judge of the Southern District of New York, Kevin Castel, issued a temporary injunction, recognizing the SEC's arguments regarding the sale of unregistered securities by the company as reasonable.

The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts.

 

Kevin Castel

U.S. District Judge

According to the judge, this feature does not allow considering the Telegram offer as subject to exceptional conditions. He also noted that Telegram structured its project in such a way as to attract “the maximum number of primary buyers” against the background of the expectation of maximum profit at the time of launch.

Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement. 

 

Kevin Castel

U.S. District Judge

Conducting an analysis from the standpoint of the Howey test, the judge stated that buyers expected to profit from participating in the campaign. Moreover, although Telegram may argue that it will not become a guiding force in the further development of TON, “in fact,” it will be precisely this.

The judge agreed to distinguish between non-existent Gram tokens and securities purchased by TON investors, but refused to support Telegram's argument that Gram would be a commodity.

The Court rejects Telegram’s characterization of the purported security in this case. While helpful as a shorthand reference, the security in this case is not simply the Gram, which is little more than [an] alphanumeric cryptographic sequence.

 

Kevin Castel

U.S. District Judge

This is not the final decision, but it can serve as a powerful indicator of what position the court will adhere to further.