The US Securities and Exchange Commission (SEC) is suing messaging app Kik over its 2017 initial coin offering that raised $100 million. Bloomberg reports that the SEC believes that the tokens issued in the sale, called Kin, count as a security, and, as a result, the sale should have been registered with the government agency. If it wins, the SEC could force Kik to offer its investors their money back.
At one time, Kik was a major messaging app in the US, and it was especially popular with children and teenagers. Unfortunately, this popularity contributed to it becoming “the defacto app” for child predators, according to a report released in 2017. As it lost users and its revenue declined toward the end of the year, the SEC alleges that the company sought to use the ICO as a “hail Mary pass” to reverse its fortunes. At the time, Kik said its goal was to create a platform for app developers and users, allowing them to pay one another using the decentralized currency.
Kik has welcomed the lawsuit. “What’s exciting to me is that this industry is finally going to get the clarity it so desperately needs,” its CEO, Ted Livingston, told The Wall Street Journal. The company recently set up a crowdfunding campaign called DefendCrypto.org to raise money for its legal defense, which has raised $4.3 million in donations from supporters as of publication.
The SEC uses what’s called the “Howey test” to determine whether an ICO’s tokens count as a security. In simple terms, if a token’s value rests on the prospects of just one company, then it’s likely to be a security; if it’s decentralized enough, then it probably isn’t. In 2017, the SEC concluded that the Decentralized Autonomous Organization’s (DAO) ICO was a security using this test, while Ethereum tokens are decentralized enough that they aren’t. In reference to this test, last year, the SEC launched a fake ICO called “Howey Coin” to warn people about the dangers of unregulated ICOs.
In response to the SEC’s announcement, the value of Kin has plunged by over 30 percent in the past 24 hours.