Judge Rules Kik's Token Sale Violated US Securities Law

A U.S. judge ruled Wednesday that Kik violated securities law when it raised $100 million via a token sale in 2017.

Judge Alvin Hellerstein, a U.S. district judge for the Southern District of New York, wrote that in his view, Kik's "token distribution event" (TDE) satisfied the three prongs of the Howey Test, referring to the U.S. Supreme Court case used as a standard for determining whether the sale of something is a securities sale.

The Securities and Exchange Commission (SEC), which filed the suit against Kik last year, had maintained the messaging platform's Kin token sale was an unregistered securities offering, while Kik claimed it was not.

"Kik concedes that its issuance of Kin through the TDE involved an investment of money by which participants purchased or acquired Ether and exchanged Ether for Kin. Thus, the parties agree that the first element of the Howey test is satisfied," he said in the 19-page ruling. "The parties dispute whether the second and third elements are satisfied. I hold that that they are."

Initial coin offerings (ICOs) and token sales have been treated as unregistered securities sales for the most part by the SEC, which has filed suits against numerous startups and companies, including Telegram, another messaging company that raised a mammoth $1.7 billion.

Many of these cases use Howey, which says something might be a security if there is an investment of money in a common enterprise, with the expectation of profit, primarily from the efforts of others.

Judge Hellerstein wrote Wednesday that Kik "extolled Kin's profit-making potential," satisfying one of the prongs, and that Kik "pooled proceeds from its sales of Kin in an effort to create an infrastructure for Kin, and thus boost the value of the investment."

This satisfies another prong, he said.

Read more: The SEC Case Against Kik's ICO Appears Strong, Experts Say

In a statement, Kik CEO Ted Livingston said he was "disappointed in this ruling," and that the company is considering its options, including a potential appeal.

"To be clear, Kik has always supported the Commission's goal of protecting investors, and we take compliance seriously," he said. "In preparing for the sale of Kin, Kik retained sophisticated counsel (both in the United States and internationally) to analyze the law as we understood it, and we continue to believe that the public sale of Kin was that of a functional currency and not a sale of securities."

Livingston added that the ruling would not impact kin.

Read more: The 8 Biggest Bombshells From the SEC's Kik ICO Lawsuit

Kik General Counsel Eileen Lyon took aim at the SEC in a statement, saying the agency "should engage in proper rulemaking, including the opportunity for public commentary, rather than force our industry to hunt for regulatory clues among the SEC's conflicting statements, Commissioner and staff speeches, no-action letters, closed-door meetings with the SEC and nonprecedential settlements."

The parties have until Oct. 20 to file either a joint proposal for providing relief to Kik's investors, or a document explaining their positions on how to proceed.