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It has been widely reported that the SEC sued Kik Interactive Inc. for conducting an illegal $100 million securities offering of digital tokens.  The SEC charges that Kik sold the tokens to U.S. investors without registering their offer and sale as required by the U.S. securities laws.

To many crypto enthusiasts, I am sure this is viewed as a hard ball tactic.  But the SEC complaint here seems to differ in one important respect from other SEC complaints I recall reading dealing with massive unregistered offerings.

What is different?  The SEC only charged Kik and not any individual officers, directors or others that participated in the alleged unregistered offering. So maybe they are playing soft ball. Individual accountability is an important thing that government regulators have emphasized from time to time.

The complaint contains many unflattering facts about those associated with the offering assuming the SEC allegations are true.  SEC complaints always set forth unflattering allegations so perhaps they couldn’t resist and don’t intend to sue anyone individually.

It wouldn’t serve any useful purpose if I were to speculate what individuals could be charged for.  I don’t know if any individuals violated securities laws, or of any undisclosed facts and no court findings have been made that anyone violated the law. It is however different than other SEC enforcement actions to my recollection.

What does the SEC have up its sleeve?  I don’t know that either.  It’s possible however, that since this is a first of a kind case, the SEC wants to see if its position survives the inevitable motion to dismiss.  If it does, and Kik is reluctant to settle, perhaps the threat of naming individuals will move things along. So maybe the end game is to play hard ball.

Another unusual thing about Kik is the public visibility into the defendant’s thinking.  Fred Wilson, a noted venture capitalist, published a blog post stating “One of the crypto projects that the SEC has been investigating, where I have had a front-row seat, is the Kin project that was birthed by USV’s portfolio company Kik, where I am on the Board.”  The blog post goes on to state:

Sadly, the SEC looks at crypto tokens and sees securities that they want to regulate as such. They cannot seem to understand that not all of these assets are securities, they cannot seem to understand that most are commodities, currencies, or utilities like frequent flyer miles. They cannot understand that crypto tokens are unlike any assets that have come before them and that crypto tokens need new regulatory structures. They cannot understand that their unwillingness to come up with new rules paired with their “regulate by enforcement” strategy is hurting the crypto sector, pushing it offshore, and is causing most of the new projects to raise capital outside of the US and/or put together legal structures that look like Frankenstein monsters . . .

Kin is a digital currency (not a security) that is in use in over 40 mobile apps now. Last month over 1mm users earned Kin in one of those mobile apps and over 300,000 users spent Kin in one of those mobile apps. Kin is one of the most used crypto currencies in the world.

And yet the SEC won’t agree to settle with Kin on reasonable terms. Instead they want to force Kin to become a security, which would decimate its appeal as a digital currency. Imagine that a user had to go to a securities brokerage firm like Schwab to purchase a token in order to be able to use Apple’s App Store. That is crazy and yet that is essentially what the SEC wants Kin and many other crypto projects to agree to do.

I have sympathy for Fred’s position. If I knew how to solve the dilemma I would have done so a couple of years ago and probably retired.

In case it matters to anyone, I don’t know Fred or anyone at Kik personally or the SEC enforcement staff.

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