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Title: SEC vs. Kik Interactive: A status upgrade on the Kin community and Kin tokens.
Sourced From: cointelegraph.com/news/sec-vs-kik-interactive-a-status-update-on-the-kin-ecosystem-and-kin-tokens.
Released Date: Sun, 24 Jan 2021 17:34:00 +0000.
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Much has actually been composed about the Sept. 30, 2020, decision by Judge Alvin Hellerstein of the Southern District of New York in the U.S. Securities and Exchange Commission vs. Kik Interactive..
In that order, the judge ruled in favor of the SECs motion for summary judgement, using the Howey Test in the course of determining that Kik Interactive had actually broken the federal securities laws by selling contractual rights to obtain Kin tokens and later by issuing and selling the Kin tokens themselves. Less has been said about the real final judgement, entered by the court on Oct. 21, 2020, pursuant to an agreed-upon settlement reached by the parties.
The last order of judgement went into based on that settlement tells Kik and its representatives and active participants in the original distribution who have actual notice of the order from numerous acts. Second, they must offer the Commission 45 days notification of any scheduled sale or transfer of the Kin tokens for a duration of three years, although the order specifically states that Kik need not look for the SECs approval prior to any such sale or transfer. Kik did not have to return the rest of the quantity raised, did not have to shut down the Kin network that was then in advancement, and was not required to register Kin with the SEC as a condition of moving forward.
The Kin environment: Then and now.
Provided the determination by Judge Hellerstein that Kiks sale of Kin in 2017 did include the sale of securities, and the truth that the final judgement barred the sale of unregistered, non-exempt securities by both Kik and any of its agents who have knowledge of the order, it may be surprising to some that Kin is still being purchased and sold.
As of the close of company on Dec. 28, 2020, Kin is the 130th ranked digital property by overall market capitalization according to CoinMarketCap, with a market cap in excess of $77 million and a distributing supply of simply over 1.5 billion Kin. Its 24-hour trading volume went beyond $430 million.
The reality is that the Kin environment of today is remarkably different from the one that existed in 2017, when Kik was offering contractual rights to get Kin when released (in the kind of Simple Agreements for Future Tokens, or SAFTs), and when Kin tokens were at first provided on Sept. 26, 2017. At the time that the SAFTs were at first sold, at least according to the SECs problem, “the Kin Ecosystem did not exist, and there were no services or products that might be purchased with Kin.
The Minimum Viable Product consisted of digital animation “stickers” that were described by Kik as an included advantage to Kik Messenger users who purchased Kin. The SEC characterized these as emoji-like animation figures and dismissed them as not having a real utility for Kin purchasers, who might not even purchase the sticker labels with their Kin.
This was the point at which the sale of Kin tokens fit most plainly within the Howey investment agreement analysis test. That test, in exceptionally general terms, needs: (1) the financial investment of money or something of value; (2) in a typical scheme; (3) with the expectation of profits; and (4) based on the necessary entrepreneurial or supervisory efforts of others. At the time that Kin was at first sold, the buyers were paying U.S. dollars or Ether (ETH) in exchange for the brand-new tokens, satisfying the first component.
The second element was found by the court to exist due to the fact that the fortunes of all of the buyers were looped, in addition to those of Kik, which kept a sizable amount of the overall authorized supply of Kin. As for the third aspect, the required earnings intention, there were substantial accusations about the level to which Kik had actually encouraged buyers by pitching the possible success of Kin. With regard to the managerial effort required from Kik, the court appeared to be persuaded that Kik had promised to promote the profitability, development and expansion of the Kin network as well as work towards making sure free transferability of the Kin tokens.
At the moment of issuance, there was clearly no decentralized network with a functioning market in Kin, making Kiks efforts necessary to the community and tokens success. That is the point in time at which the SECs argument that there was a prohibited sale of securities resonated most highly.
Things do, however, change, and by the time Judge Hellerstein gave the SECs motion for summary judgement, there had been a number of active Kin applications that used opportunities to earn and/or invest Kin. Judge Hellerstein recognized the development of the Kin environment in his order, keeping in mind:.
” Based on blockchain activity leaving out secondary market transactions, KIN currently ranks third amongst all cryptocurrencies.”.
Today, there are almost 60 practical apps kept in mind on the Kin Apps website. There are apps for both iOS and Android, and they include apps tailored at communication and social interaction, education, physical fitness, gaming and health, lifestyle and financing, news and entertainment, tools, travel and local activities, along with for video gamers and editors.
What makes Kin today various from the securities that were offered in 2017?
On Sept. 12, 2017, Kin was launched via a public sale called the Token Distribution Event, or TDE. The TDE involved the circulation of 1 trillion Kin tokens on Sept. 26, 2017, to a mix of the institutional financiers who had actually previously purchased the SAFTs and roughly 10,000 public buyers. Kik kept 3 trillion Kin for its own account, and an extra 6 trillion Kin tokens were dispersed to the Kin Foundation, the not-for-profit foundation located in Ontario, Canada that continues to incentivize the advancement and performance of the Kin environment, through the allowance of its Kin reserves.
At the current time, the Kin network is set up to disperse tokens as a reward through what is understood as the Kin Rewards Engine, or KRE. Third-party developers who create Kin-based user experiences and applications are rewarded with Kin tokens pursuant to the KRE, which is managed by the Kin Foundation.
While the Kin Foundation did initially own 60% of the total supply of Kin, which is topped at 10 trillion tokens, the structure is an independent nonprofit entity that is not profit-driven or incentivized. At the existing time, the participation of the Kin Foundation is created to guarantee safe transfers, proper usage of funds and avoid fraudulent activity.
The Kin Foundation has been actively motivating the advancement of the Kin ecosystem, with significant success. Not only exist more than 3 million consumers utilizing Kin in the numerous incorporated third-party apps on a regular monthly basis, but Kin has also just recently finished the bulk of a long-anticipated migration where approximately 55 million user wallets will ultimately move from the existing chain (a fork of Stellar) to the Solana blockchain. The migration was necessary due to the fact that the community had actually grown beyond the limitations of scalability on the original chain.
As an outcome of these advancements, there is an extremely strong case to be made that today, Kin tokens are not securities. In addition, offered the amazing innovation occurring as an outcome of the work of third-party designers in the ecosystem, there are policy factors not to shut down the system.
The SECs position on Kin, and indeed on every substantial crypto possession other than Bitcoin and Ether, stays uncertain or hostile. The Kin Foundation wrote a convincing blog site post back in October 2020 instantly after the final judgement was gone into in SEC v. Kik Interactive. This was a highly uncommon compromise from the SEC, which generally seeks to shutter offerings that it sees as likely to include ongoing infractions.
On the other hand, the SEC itself, in its news release announcing the settlement, asserted that the “undisputed truths” as found by the court “established that Kiks sales of Kin tokens were sales of financial investment agreements, and for that reason of securities, and that Kik violated the federal securities laws when it conducted an unregistered offering of securities that did not certify for any exemption from registration requirements.”.
Undoubtedly, the foundation can point to this language in the agreed-upon final judgement to support its position:.
” Nothing in this paragraph needs, or should be interpreted to need, Defendant to seek the Commissions approval or authorization prior to issuing, offering, selling, or transferring … [its KIN tokens], nor must this paragraph be interpreted to require Defendant to supply the Commission with any information beyond the notice considered herein.”.
If the SEC was going to take the position that the Kin tokens were still securities, this language would be essentially incomprehensible. And, in truth, the SEC has actually made no public move versus Kik or the Kin Foundation because that order was gone into. Still, the SEC is not understood for being especially helpful of crypto entrepreneurship, and as its really recent enforcement action against Ripples XRP token shows, even a period of apparent acquiescence from the commission is no assurance of continued silence.
Does this mean that personal purchasers need to fret about the long arm of U.S. securities enforcement in case the SEC does decide, at some future date, to treat Kin as securities under Howey or some other approach? Nearly assuredly not.
It holds true that Section 5 of the Securities Act of 1933 needs all sales of securities to be signed up or exempt, despite who is trading. However, everyone besides a provider, dealer or underwriter is exempt from this requirement under Section 4 of the very same act. It is also true that the meaning of an underwriter in this context is extremely intricate and far beyond the scope of this brief remark. However, somebody with no affiliation with Kik (the provider of the Kin tokens), trading today, more than two years after the initial issuance of Kin, is an exceedingly unlikely target for the SEC even if there may be a convoluted argument about the role of such individual as an underwriter.
For Kik itself, and possibly for insiders and attorneys of Kik, the outcome may be different, although as this remark recommends, there is undoubtedly a strong argument that Kin tokens today should not be dealt with as securities either as a matter of legal precedent or as a matter of good policy.
Kik did not have to return the rest of the quantity raised, did not have to shut down the Kin network that was then in development, and was not needed to register Kin with the SEC as a condition of moving forward.
The reality is that the Kin community of today is extremely different from the one that existed in 2017, when Kik was selling contractual rights to obtain Kin when released (in the form of Simple Agreements for Future Tokens, or SAFTs), and when Kin tokens were initially provided on Sept. 26, 2017. With regard to the managerial effort needed from Kik, the court appeared to be convinced that Kik had assured to promote the success, advancement and growth of the Kin network as well as work toward guaranteeing free transferability of the Kin tokens.
Kik retained 3 trillion Kin for its own account, and an additional 6 trillion Kin tokens were distributed to the Kin Foundation, the not-for-profit structure situated in Ontario, Canada that continues to incentivize the advancement and functioning of the Kin ecosystem, through the allowance of its Kin reserves.
Somebody with no association with Kik (the company of the Kin tokens), trading today, more than two years after the initial issuance of Kin, is an exceptionally unlikely target for the SEC even if there might be a complicated argument about the function of such person as an underwriter.