by Josh Lawler
It may have seemed like a good idea to send a Wells Notice to KIK1.
KIK sold millions of dollars’ worth of KIN tokens to U.S. persons in an ICO; an unregistered sale of consumptive tokens2. Under the SEC guidance to date, that is an illegal sale of securities, punishable under the Securities Act of 1933. So far (other than KIK), every token issuer to whom the SEC has focused its attention has bowed down without much of a fight.
As the SEC was to find out, KIK would not follow that pattern.
In fact, KIK would fire back, responding to the SEC in a public letter written by one of the most expensive law firms on the face of the earth, Kirkland & Ellis. Now the SEC has a Hobson’s choice. Pursue KIK in an action where even if they win, they really lose; or slowly and quietly back away with no further action… continuing their unfortunate silence as to regulatory guidelines for sales of digital assets.
KIK’s sale of KIN tokens took steps to avoid classification as a regulated sale of securities:
- KIK’s messaging app existed prior to the issuance of KIN tokens.
- KIK paid income tax on the proceeds they received from the sale of KIN tokens.
- KIK put a cap on the number of Tokens any single purchaser could purchase of $4,400.
- KIK’s offering materials did not tout the KIN token as an investment.
Whether the sale of the KIN tokens was a public sale of securities, conducted illegally, can be hotly debated3. More importantly, a decision either way would provide some needed regulatory guidance with respect to the laws applicable to sales of digital assets. Accordingly, many, including Ted Livingston, the CEO of KIK, would very much like to see this case move forward.
As if the stakes were not high enough, the SEC has another problem; even if they win, they lose. One of the main reasons the SEC exists is to protect the “Main Street” investor. Unfortunately, as astutely pointed out in KIK’s response to the Wells Notice, enforcement against KIK will hurt the very people the SEC is supposed to protect. The KIN ICO raised nearly $100 million from a large number of people. Given the $4,400 per person cap on purchases, over 20,000 people purchased KIN. In the two years that followed many of those original purchasers sold the KIN they purchased to secondary purchasers.
At this point, the KIN token is very widely distributed. If the SEC were to succeed in an enforcement action against KIK, the main result would be that KIK would be subject to large scale monetary penalties4. Even bringing the enforcement action will result in an expensive battle for KIK5. That liability results in a major detriment to KIK’s ability to further their project, ironically the very thing that the current holders of KIN need to succeed in order to see the value of their KIN tokens increase6. In short, if the SEC wins, the “Main Street” investors holding KIN lose.
The SEC already has a perception problem. No one denies that protecting the “Main Street” investor and overseeing orderly markets is a very worthwhile goal. The problem is that in pursuing that goal, the SEC has created a perception that they are against innovation. They may protest otherwise (and they may be right), but as issuers of digital assets eschew the United States for more lenient (or at least more definite) regulatory environments, one cannot deny that the SEC appears at best reticent to allow the new technology to flourish. One can imagine the outcry from the public that would result if the SEC pursued KIK for a win with a draconian penalty.
So now what? Nothing actually compels the SEC to pursue KIK any further. The purpose of the Wells Notice, is, in fact, to allow a would-be-target of SEC enforcement an opportunity to convince the SEC not to take action. If the SEC brings the case, they have no truly positive outcomes. If the SEC announces they will not bring the case, they embolden issuers of digital assets to encroach on turf the SEC has thus far vigorously defended. Of course, the SEC can stick with its established modus operandi, provide no guidance at all. Say nothing at all; just back away, slowly. Unfortunate, but probable.