The Good News on Kik’s Settlement with the SEC

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With the SEC ending its long battle with Kik, the Blockchain Association is optimistic about the ability of the crypto industry to move forward and continue innovating.

The SEC and Kik settled their yearlong lawsuit this fall, following a summary judgment decision by a district court in New York. Kik agreed to pay a $5 million fine and to notify the SEC in advance of certain activities. The settlement does not require that Kik shut down its token network or register Kin as a security, and there is a pathway for Kin to move forward without the cloud of the SEC.

The Blockchain Association filed an amicus brief, as a “friend of the court,” in support of Kik in the New York district court. The brief explained the basics of blockchain and cryptocurrency, explained how cryptocurrencies vary widely, and asked the court to make sure that its decision would be narrowly tailored to the specific facts in Kik so that the decision would not affect other cryptocurrency companies.

The Blockchain Association disagreed with the district court’s summary judgment decision and is concerned about the potential effect that enforcement actions like this one could have in deterring innovators from investing in this important technology. However, the Blockchain Association views the decision as having little legal effect on the industry. The decision was a district court decision by one court in New York — not binding precedent — and is tailored to the specific facts in Kik’s case.

The test for determining whether something is a security is always specific to the facts and circumstances of that particular case, and Kik’s token offering was unique. Many projects enter into agreements to deliver future tokens to accredited investors only (under a securities law exemption for sales to accredited investors), and then use those funds to build a network that is fully functional and decentralized. Only once the network is fully functional and decentralized (i.e., not implicating securities laws) do those projects subsequently allow tokens to be sold to the general public. By contrast, Kik sold tokens to the general public just a few days after its sale of future tokens to accredited investors, which is unlike the approach of most other token projects.

While the Blockchain Association disagreed with the summary judgment decision, the Blockchain Association is heartened that Kik’s token project may move forward fundamentally unharmed.

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