Judge Alvin Hellerstein from US District Court recently granted the US SEC its motion for summary judgment against Kik Interactive. The SEC purported and offered the Kin digital tokens in violation of the federal Securities act.
The rule comes after more than six months after both sides filed the motions for summary judgment, looking to bring the court case to an end without a trial. Presently, the historic civil case is one step closer to the unavoidable conclusion: penalties.
Kin is a Canadian company with a messenger app of the same name, seeing to create its cryptocurrency, Kin, to monetize app use.
Kik has sold $50M in Kin tokens dating from June to September of 2017 as a part of a private pre-sale to 50 investors. As part of the “Simple Agreement for Future Tokens,” or SAFT, investors have understood that they were getting in at a discount. They have overtly agreed that they were buying security.
In September, Kik has held a public sale of the token, during which it brought an additional $49.2M.
When it was announced, the SEC had yet to make the rules for governing cryptocurrencies like it. The agency’s DAO Report, which is set to some rough guideline for when the token offerings can be considered securities, came out in July 2017, as Kik was putting its sale into motion.
After two years, the SEC has charged Kik with violating Section 5 of the Securities Act – it has offered and sold securities in the US without being registered on doing so.
Though he further noted that there was little in the way of judicial precedent that guides him, the judge has agreed.
The root of the case has surrounded whether the sale met the Howey Test, a nearly century-old yardstick for classifying security: There must be “1) an investment of money, 2) in a common enterprise 3) with profits to be derived solely from the efforts of others.”
Whereas Kik and the SEC have settled that money was capitalized, they have distressed parts two and three.
When it comes to a joint enterprise, Judge Hellerstein wrote that “Kik established a common enterprise in order for summary judgment. Kik deposited the funds into a single bank account. Kik used the funds for its operations, including the construction of the digital ecosystem it promoted.”
For part three, there has been an expectation of profits. Judge Hellerstein again said that there was, using the word of Ted Livingston, Kik CEO, against him:
The judgment doesn’t somewhat bring the case to a close. In its place, it has been mandated that “the parties shall jointly submit a proposed decision for injunctive and monetary relief by the time of October 20.