In 2017, the messaging application Kik raised a staggering amount of $100 million through its token sale, utilizing initial coin offering (ICO). But since the regulatory body in charge of overseeing such issues, the U.S. Securities and Exchange Commission (SEC), considers digital tokens issued by Kik as securities, the failure of the company to register with the SEC has led to this current situation of Kik being sued by the authority.
The Initial Coin Offering (ICO) boom of 2017 took everyone by storm. It became one of the most prominent ways of raising money for many platforms. Newly launched platforms offered their tokens to the public thus raising huge investments from around the globe for their own ecosystems. But this boom led to an increase in the number of scams as well, trapping many investors in the community. The regulatory body in charge, SEC is there to ensure complete security of the investors as digital tokens are considered as securities by the SEC that need to be registered. Investors are also warned by the regulator regarding the aspect of buying digital tokens because of scams that are present in the crypto space in abundance. With the passage of time, the ICO boom ended owing to the regulatory issues and a shift is being seen.
Since Kik failed to register, as per the regulator, this step of suing it had to be taken. If the SEC is able to win this case, it can force Kik to pay its investors their money back.
Steven Peikin, the co-head of SEC’s enforcement division has stated:
Companies do not face a binary choice between innovation and compliance with the federal securities laws,
In Tuesday’s court filing by the SEC, important details about Kik’s ICO are also highlighted in terms of the company’s status at the time of its ICO. As suggested b the filing, Kik was struggling with its expenditures and growth back in 2016 and 2017. The company was facing a severe crisis and it was expected that the company would run out of its fund to run its operations as the revenues were too insignificant.
It is stated in the filing by the SEC:
“Under the federal securities laws, Kik offered and sold securities from the initial May 2017 announcement of Kin through September 2017. But, Kik has never filed with the SEC a registration statement for its offer and sale of securities. By failing to prepare and file a registration statement, Kik did not provide important information to investors regarding the investment opportunity promoted by Kik, such as information about Kik’s current financial condition (including that the company’s expenses far exceeded its revenue), future plans of operation and budget, the proposed use of investor proceeds, and detailed disclosure of material trends and the most significant factors that made the offering speculative and risky. Kik thus failed to disclose information relevant for investors to evaluate Kik’s promises about the investment potential of Kin and the Kin project.”
Around the same time in 2017, the blockchain world started gaining more attention with an enormous amount of capital and intellect flowing into it. In order to save itself and accumulate funds to run operations of the company, Kik decided to step on the blockchain bandwagon and offered one trillion digital tokens through an ICO. Out of the $100 million raised in cash and Ether, a mammoth $55 million came from the U.S. investors.
The war between Kik and SEC is officially on now. Kik has backers on its side as well. Venture capitalist Fred Wilson even defended the digital currency Kin stating that it is not a security. Kik has set up a crowdfunding site to raise money in order to fight against the SEC’s probe into the company as well.
Overall, the ICO storm has withered as a more preferred method of raising investments, Security Token Offering (STO) has emerged. Unlike ICOs, STOs boast a more regulation-compliant way of raising investments. Through these offerings, investors are assured of their ownership as legal obligations have to be fulfilled by the company doing an STO. These are considered to be the “future way” of conducting a token offering in the blockchain world. For those projects which have done their ICOs in “pre-regulatory enforcement” times, things do not seem to be well-aligned at the moment.