On SEC v. Kik
The case does not signal a policy shift by the SEC away from its reasonable guidance
When Kik made public its Wells notice response in January, many folks asked us what we thought and whether we would be commenting on the matter. What we told anyone that asked was simple: If the facts were indeed as presented in Kik’s response, then by suing Kik the SEC would be reversing itself on the interpretation of the Howey test articulated by Director of Corporation Finance Bill Hinman in June 2018 and confirmed by Chairman Clayton in March of this year. We have long held that Director Hinman’s analysis was on the mark, so we would strongly oppose the SEC walking it back.
However, all we had at that time was Kik’s Wells notice response. The Wells notice from the SEC to Kik was a short two pages, and it did not allege any facts nor offer any interpretation of the law. So, we told folks who asked us, we would have to wait to see what the SEC had to say (if anything) before it would be appropriate for us to comment publicly.
Now the SEC has filed suit in federal court against Kik and, in its complaint, it alleges facts very much at odds with those presented in Kik’s Wells notice response. Two quick examples: While the Kik response asserts that it marketed Kin primarily as a consumer currency and not an investment, the SEC’s complaint cites multiple instances of Kik representatives seeming to publicly tout a profit opportunity dependent on Kik’s efforts. And, while the Kik response states that Kin was only sold to the public after the Kin network was functional, the SEC cites internal Kik communications that suggest that the initial functionality was effectively a fig leaf. Indeed, the SEC alleges that Kin could not be used to purchase anything at launch and that Kik at the time admitted that the underlying network (Ethereum) would not be capable of dealing with the transaction volume had they enabled Kik users to send and receive Kin through the app.
If the facts are as alleged in the SEC complaint, then this is not a case of innovators stepping inadvertently on a landmine because of “lack of regulatory clarity.” Rather, it’s a case of potential non-compliance with relatively uncontentious law. The truth might be somewhere in between the facts as alleged in the initial Kin brief and as alleged in the SEC complaint, and now it’s up to a fact finder–a jury or a judge–to make that determination.
What this means from Coin Center’s perspective is that, at the moment at least, this case does not seem to turn on any question of law, but on questions of fact. The SEC’s case, as laid out in its complaint, is consistent with the policy articulated by Director Hinman and confirmed by Chairman Clayton. Since this suit doesn’t seem to signal a policy shift by the SEC away from what we think is a proper interpretation of Howey, there’s nothing really for us to say until the facts are settled.
Finally, if the facts are as the SEC alleges, then we wonder whether this is the best case for those seeking to set a precedent that clarifies Howey in the context of token sales. Remember that the question at issue is not whether Kin today is a completely decentralized network with many independent developers, users, and apps—like Bitcoin or Ethereum—or whether the SEC has legal authority over such a network. The question now appears to be much narrower and mostly factual: at the time of the public sale, did Kin have any functionality that wasn’t simply formalism, and was Kin marketed to the public as an investment the profitability of which was clearly dependent on the Kik’s efforts? Legal clarity on the Howey test can only come from a case where the facts are not contentious but a genuine question of law remains unsettled; it may be that this will become such a case after the facts have been determined by a judge or jury, but that remains to be seen. For our part we will continue to wait and see.