Partner Kayvan Sadeghi discussed key topics related to the U.S. Securities and Exchange Commission’s (SEC) recently filed complaint against Kik Interactive Inc, a Canadian messaging and cryptocurrency company, for allegedly conducting an illegal $100 million securities offering of digital tokens.
This first-of-its-kind suit may serve as an important test case and opportunity for the cryptocurrency and blockchain industry to try to apply limits to the “Howey” test, a test used to determine whether an investment contract exists.
Kayvan said, “The Kik offering is a difficult test case because it involved a fundraising initial coin offering (ICO) with tokens for an Ecosystem that was not functional at the time of the offering. That is a pretty direct assault on the Howey test. Even if a court is persuaded that the Howey test needs updating, it may feel constrained to follow the Supreme Court and difficult to distinguish Howey on these facts.”
But does Kik’s digital token, called Kin, constitute a security? Kayvan said that, according to the SEC’s complaint, at the time of the offering the agency viewed the Kin token itself as a security.
However, “it is less clear whether the SEC views every transaction using a Kin token as a securities transaction today,” he said. “The Kik Complaint does not include any allegations or causes of action directed at current use of the Kin token.”
He added, “…the SEC is very likely to view any unrestricted tokens sold pursuant to a simple agreement for future tokens (SAFT) as securities that should be subject to the same restrictions. In the current environment, many projects may have good reason to consider alternatives that do not involve using the same token for fundraising and for subsequent platform functionality."
Though SEC v. Kik Interactive may eventually set court precedent for these type of cases within the industry, Kayvan said not to expect any rapid developments.
“The road to trial is long, risky, and very expensive,” he said. “Companies rarely go the distance against the SEC and it is still likely that Kik will settle along the way.”
While everyone is currently focused on the Kik case, Kayvan said that the New York State Attorney General’s proceeding against iFinex, Inc., operator of the Bitfinex virtual asset trading platform, may end up having greater legal impact on the cryptocurrency space.
“The case against Bitfinex is slated for argument in July on a motion that raises threshold questions about the scope of the N.Y. AG’s territorial and subject matter jurisdiction over crypto companies,” he said.
That said, Kayvan added that people should not get their hopes up that either of these early cases will do much to shift the law anytime soon.
“The judge in the Bitfinex case has seemed hesitant to directly take on the definition of a security, and the federal court in the Kik case may also steer clear of disrupting the law if at all possible.”
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