Kik says SEC badly distorts the facts in lawsuit

Unregulated sale of securities alleged

TORONTO Kik Interactive Inc. has come out swinging against the U.S. Securities and Exchange Commission, issuing a blistering response to the watchdog’s allegations that the company engaged in an unregulated sale of securities when it sold US$100 million worth of cryptocurrency in 2017.

Kik’s 131-page defence, which was filed in court, parses the SEC lawsuit line-by-line, disputing most of the facts and arguing that the case takes quotes out of context and misrepresents reality.

“The result is a complaint that badly mischaracterizes the totality of the facts and circumstances leading up to Kik’s sale of Kin in 2017,” Kik’s filing says.

“These tactics may have gotten the Commission a decent news cycle, but they will not withstand meaningful scrutiny at summary judgment or trial.”

The SEC complaint, filed in early June, alleges that Kik’s cryptocurrency Kin fell under the definition of an “investment contract” which the commission described as “transactions where an individual invests money in a common enterprise and reasonably expects profits to be derived from the entrepreneurial or managerial efforts of others.”

According to the SEC complaint, about US$55 million of the money raised came from U.S. investors.

Kik’s defence argues that the regulatory landscape around cryptocurrencies at that time was murky, but that the company did its best to comply with the rules, and to “anticipate where the rules will land.”

The Waterloo, Ont.-based company also said the SEC complaint takes key quotes from company officials out of context to make the situation appear more damming than it really is.

Kik operates a messaging app with millions of users, but has been unable to successfully monetize the service.

The company was at one time valued at more than US$1 billion based on a US$50 million venture capital investment round led by Tencent Holdings, one of China’s biggest technology companies.

Kin was meant to be a cryptocurrency built on a blockchain system with a fixed number of total tokens.

The company’s plan was to sell 10 per cent of the total tokens available to early backers for $US100 million, while Kik held onto 30 per cent of the tokens, and if the price of the Kin cryptocurrency increased over time, Kik would be able to profit by selling those tokens.

The remaining 60 per cent of the Kin tokens were to be held by the Kin Foundation and distributed in ways to encourage widespread adoption of the digital currency, both on Kik and elsewhere.

The Kin Foundation is independent from the company, but Kik CEO Ted Livingston was one of the two board members controlling the foundation.

‘HAIL MARY’ SCHEME

Before coming up with this plan, according to the SEC complaint, Kik unsuccessfully tried to sell itself, and when that failed, the company engaged in a “Hail Mary” scheme to develop a cryptocurrency built off the messaging app.

But that “Hail Mary” quote is one of many instances where Kik says the SEC is quoting company officials without adequate context. In its response to the SEC, Kik says that the full quote from one of the company’s board members expressed literally the opposite thought.

“The more I think about it, I think this is a great idea. People call it a hail Mary but to me that is a longshot and I really do not think it is a long shot,” the unnamed board member allegedly said.