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The US Securities and Exchange Commission sued KIK instant messaging software maker for its $ 100 million ICO – which the agency said was an unregistered sale of securities – and The regulator appears to have been a strong argument in its original court decision.
In a complaint filed on Tuesday, the SEC alleged that Kik had violated federal securities legislation by not registering his sale of family tokens. In an answer, Eileen Lyon, Kik's general counsel, said that the SEC's complaint set out a number of erroneous assumptions that "extend the Howey test well beyond its definition" and that the pressures from the agency will not withstand judicial scrutiny.
Nelson Rosario, director of Smolinksi Rosario Law, told CoinDesk that the complaint filed by the SEC against Kik was similar to others against other initial coin offerings, particularly with respect to the evidence presented by the regulator.
"This is obviously a very sophisticated offer of chips, made by an already established company [and not a token startup] but [the] The type of evidence that the SEC provided is very similar to the one it presented against [other ICOs]," he said.
However, perhaps the most distinctive aspect of this case is the fact that it focuses strictly on an allegation of violation of section 5 of the Securities Act of 1933.
"Until now, all of the SEC's challenged enforcement actions implied an element of fraud or willful misconduct," said Jake Chervinsky, general counsel at Compound Finance. He told CoinDesk:
"Kik is important because it represents the SEC's first enforcement action for a purely regulatory violation – that is, a case in which a fictitious issuer simply failed to register. with the SEC on the basis of a good faith interpretation of the law.
Rosario agreed, noting that this case did not involve any alleged fraud, unlike Stephen Palley, an attorney at Anderson Kill.
"It's a" you have not been registered ", it's not a title fraud, the allegation is" you have security and you have not registered it, "" said Palley to CoinDesk.
Solid case
Drew Hinkes, a lawyer for Carlton Fields and Athena Blockchain's general counsel, said the SEC had included a lot of facts in his case.
The regulator has provided evidence from YouTube, Slack messages, Twitter and even a road show that Kik organized at the very beginning of his chips sale.
"The SEC has a ton of documentary evidence and a ton of facts," he said.
This argument was echoed by Palley and Katherine Wu, an independent legal researcher.
"[It] remind me of Carl Sandburg's quote: If the facts are against you, argue the law. If the law is against you, discuss the facts. If the law and the facts are against you, crush the table and shout like hell, "said Hinkes, adding:
"Looks like there are a lot of strong facts in favor of the SEC … now, the issuer can enforce the law."
The facts are likely the same as those that Kik will use to assert that this did not violate the Securities Act, Wu added.
In addition, Hinkes noted that "the facts are not as crucial as the way the law is applied to the facts".
On the facts, however, it is where a precedent can be created.
Wu said that, according to her, the symbolic sale of Kik in 2017 "was very typical" of the other post offices at the time. The facts relied on by the SEC to allege that Kik breached securities registration obligations could involve other symbolic sales, particularly those made after the publication of the CAD report that year.
"If it's a win for the SEC, it will require a ton of ICO projects as problematic to be forced to register or pay back their profits," she said.
In addition, the DAO report was actually mentioned in the SEC's complaint on Tuesday.
"Carrot and stick"
For some, Tuesday's SEC trial was inevitable.
Chervinsky noted that the regulator had invited crypto startups to work with it, giving businesses a chance to comply with federal securities laws.
He noted that the regulator had investigated "dozens or hundreds" of companies that performed ICOs, but that Kik was the first to seize the courts for violation of the registration.
"The SEC has adopted a" carrot and stick "approach to crypto-regulation … This invitation was carrot. This coercive action is essential, "he said.
Similarly, Palley said that this case should not be a surprise and that Kik had probably anticipated the complaint.
This anticipation could even be the reason why the company began funding crowdfunding defense, he added, referring to Kik's recently announced Defend Crypto campaign last week. He added:
"I would be surprised if all this shocked someone."
Michael Arrington, one of the sponsors of the campaign, said in a statement: "I do not speak on behalf of the company and I do not speak to them since the news, but from our point of view, this was anticipated and represented the entire project. point of the countryside. We continue to fully support their right to appropriate defense and hope that such cases will clarify the regulation of this growing industry. "
Kik essentially told the SEC that she should file a lawsuit by publicizing the SEC's view of Wells and her subsequent response, Chervinsky said.
"By publishing his response in Wells, Kik essentially rejected the challenge and challenged the SEC to sue. The fact that they did it today should not surprise anyone. Kik got what he wanted: a fight in open court rather than behind the closed doors of the SEC, "he said.
Create a precedent
The fact that Kik was already an established company before its international organization of the company – regardless of its financial situation – means that the outcome of this case could have a wider impact than others. Rosario noted that the sale of Kik "involved some very sophisticated parts".
That being said, the case is just beginning.
The SEC may have a strong complaint, but that does not necessarily mean that the case will go to trial by jury, said Palley, adding:
"The complaints always look annoying … you always read them and you think" it's not good, "it's essential."
Wu pointed out that "complaints are always super-biased" because they are designed to make an argument.
A court or jury may not interpret the complaint as a scathing indictment (in the non-legal sense), and it is quite possible for Kik and the SEC to reach a settlement before a jury trial.
In addition, the way in which the SEC has opened its complaint is moving away from its mandate, said Diego Zuluaga, of the think tank Cato Institute.
According to him, the first pages of the SEC complaint criticize his economic model, which is not his job.
"They try to make people believe [Kik]," he said.
The complaint was that "the Kik company was in decline and its messaging application was losing revenue and users," but the company suddenly launched a cryptocurrency, he concluded:
"That may or may not be the case, and I'm not taking sides … but it's not up to the SEC to judge business models, it's intended to make juries believe their goals are fraudulent. "
Image via Brady Dale for CoinDesk
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