With the passing of every month, the investment industry sees another round of enforcements involving the mishandling of initial coin offerings ("ICOs").
The still nascent landscape of cryptocurrency investing continues to pose significant difficulties for investors, firms, and regulatory authorities alike.
Kik Interactive, Inc. Charged by SEC
On June 4, 2019, the U.S. Securities and Exchange Commission ("SEC") charged Kik Interactive Inc. ("Kik") with conducting an illegal $100 million securities offering of digital tokens.
According to the SEC charges outlined in its press release, Kik sold the tokens to U.S. investors without registering the tokens as securities.
SEC Allegations of Failure to Register Tokens as Securities
Considering the state of Kik's financial health at the time the offering took place, the company's efforts could be interpreted as a last-ditch effort by the company to stay afloat. Kik had suffered continued losses on its online messaging application, with management projecting that it would run out of money in 2017.
Early that year, the company attempted to change to a new type of business that it financed with more than $55 million raised from U.S investors through the public sale of one trillion digital "Kin" tokens.
The SEC's complaint alleges the following:
- The Kin tokens traded recently at about half of the value that public investors paid in the offering;
- Kik marketed the Kin tokens as an investment opportunity;
- Kik allegedly told investors that increasing demand would drive up the token's value and that the company would work to spur increased demand, incorporating the Kin tokens into its messaging app, creating a new transaction service, and building a system to reward other companies that adopt their coin offering;
- Kik promised these services and systems despite having yet to create them; and
- Kik claimed that it would keep three trillion tokens to immediately trade on secondary markets, allowing Kik to profit alongside investors.
"Kik told investors they could expect profits from its effort to create a digital ecosystem. Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws," said Robert A. Cohen, Chief of the Enforcement Division's Cyber Unit.
The Expected Consequences for Failing to Register
Kik is charged with violating the registration requirements of Section 5 of the Securities Act of 1933, and the SEC is seeking a permanent injunction, disgorgement plus interest, and an additional monetary penalty.
"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. Companies do not face a binary choice between innovation and compliance with the federal securities laws," said Steven Peikin, Co-Director of the SEC's Division of Enforcement.
Unfortunately for Kik, it has been added to the growing list of companies being enforced by the SEC for the improper sale of ICOs, including:
Protecting Your Firm With Proper Due Diligence
The potential for profit through cryptocurrency and other digital investments has raised the interests of investors and firms alike.
If you're planning to include cryptocurrencies or other digital products in your portfolio offerings, it is critical to stay abreast of the latest developments in regulations. In addition, advisors recommending these types of investments should perform adequate due diligence and be sure that your regulatory policies and procedures are in place relating to such offerings.
Learn more in our recent article, Where Do Cryptocurrencies Fit in the Regulatory Landscape?
For any further questions you may have regarding cryptocurrencies, or for any other legal concerns your firm may have, contact the attorneys at Jacko Law Group, PC, here.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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