Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In Ephrat et al v medCPU, Inc., the Delaware Court of Chancery considered whether a separation agreement released claims of advancement pursuant to medCPU’s, or the company’s, certificate of incorporation. The plaintiffs, former officers and directors of the company, sued to enforce their rights to payments under a separation agreement. The company counterclaimed, alleging the petitioners had breached the separation agreement and had no right to payment. In this case, the plaintiffs sought advancement to defend themselves against the counterclaims.

The parties agreed New York law applied.  According to the Court, New York law provides that “Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release. If the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” “No particular [form] of words is required to make a written release effective; all that is necessary is that the words show an intention to discharge. The scope and meaning of a release will be determined by the manifested intent of the parties,” and “the context of the controversy being settled.”

The Court stated the release in section 3(a) of the separation agreements only covered plaintiffs’ rights as employees. The release encompassed claims “relating to or arising out of Executive’s employment with the Company Released Parties or the termination thereof.”  Plaintiffs’ contrasted this language against medCPU’s release of claims against plaintiffs in Section 3(b), which included “any claims in any way related to Executive’s employment with the Company or his/her acts or omissions as a director or officer of the Company.” Plaintiffs’ pointed to Section 3(b)’s additional language referencing acts as a company director or officer, absent from Section 3(a), and concluded they did not release claims stemming from their status as directors or officers, including their advancement rights.

The Court stated plaintiffs’ argument was bolstered by the enumerated released claims. These included claims arising under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, and the Americans with Disabilities Act. The enumerated list was followed by more general types of claims: “any other federal, state or local statutory laws relating to employment, discrimination in employment, termination of employment, wages, benefits or otherwise; or any other federal, state or local constitution, statute, rule, or regulation, . . . addressing fair employment practices.”  These laws govern claims that any employee could potentially assert related to her employment or the termination of her employment. They are narrowly described, and do not include sources of advancement. And under the canon of ejusdem generis, the Court read the general categories in light of the preceding specific employment laws.  The Court stated nothing in this provision shows an intent to release advancement claims.

The Court held section 3(a) released rights within the contractual employee-employer relationship, and not the advancement and indemnification rights under the company’s certificate of incorporation.

It is likely the result would have been different had section 3(a) specifically released rights to advancement or at a minimum released claims in capacities as officers and directors.

The Federal Trade Commission, with the concurrence of the Antitrust Division of the U.S. Department of Justice, has approved amendments to the Hart-Scott-Rodino Rules and to the instructions for filling out the Antitrust Act Notification and Report Form, often referred to as the HSR Form.  The new HSR Form and HSR Rules are effective September 25, 2019.  The action was taken without public comment.

The HSR Form is used to report a proposed merger, acquisition, or similar transaction under the Hart-Scott-Rodino Antitrust Improvements Act. The FTC amended the HSR Rules and the HSR Form’s filing instructions to incorporate the new 10-digit North American Product Classification System, or NAPCS, codes introduced by the Census Bureau, and the updated 6-digit North American Industry Classification System, or NAICS, codes.

Beginning September 25, 2019, filers submitting data on non-manufacturing revenue will be required to use 6-digit NAICS codes. Filers submitting data on manufacturing revenue will be required to use new 10-digit NAPCS codes.

Incorporating the 10-digit NAPCS codes into the HSR Form and the Instructions will ensure that filing persons provide revenues in a format that can be compared by the FTC and DOJ to the most recent and complete economic data published by United States Census Bureau,. The amended HSR Form and Instructions will continue to require the use of 6-digit NAICS industry codes for non-manufacturing revenues. For manufacturing revenues, filing persons will be required to report revenue in both the 6-digit NAICS industry code, as well as the 10-digit NAPCS product code. The reporting of overlaps in Item 6 and Item 7 has been based upon 6-digit NAICS codes and will not change.

In House v. Akorn, Inc. the United States District Court for the Norther District of Illinois Eastern division related to the proposed acquisition of Akorn by Frensenius Kabi AG.  The plaintiffs in these cases sued Akorn and members of its board of directors seeking certain disclosures regarding the proposed acquisition. Akorn revised its proxy statement and issued a Form 8-K.  Plaintiffs then dismissed their lawsuits and settled for attorney’s fees.  Theodore Frank, an owner of 1,000 Akorn shares, then sought to intervene to object to the attorneys’ fee settlement.  The Court denied Frank’s motion to intervene, but in light of Frank’s arguments, ordered the defendants to file a brief addressing whether the Court should exercise its inherent authority to abrogate the settlement agreements under the standard set forth In re Walgreen Co. Stockholder Litigation.

In determining whether the settlement agreement should be abrogated, the Court considered the requirements of SEC Rule 14a-9 and the standard of materiality set forth in TSC Indus., Inc. v. Northway, Inc. The Court noted that “[o]mitted facts are not material simply because they might be helpful.”

Citing the Walgreen case, the Court stated the Seventh Circuit heightened the foregoing standards in the context of reviewing approval of a class settlement of claims for disclosures under Rule 14a-9. In Walgreen the Court adopted the Delaware Trulia standard which held that disclosures must be “plainly material . . . . mean[ing] that it should not be a close call that the . . . information is material.”

In the Akorn case, no class had yet been certified. Therefore the Court expressed its view that  the Court must assess whether the disclosures plaintiffs’ sought in their complaints—not the disclosures Akorn made after the complaints were filed in the revised proxy and Form 8-K—are plainly material.

All three plaintiffs sought GAAP reconciliations for projections included in the proxy statement.  Certain projections showed a sudden drop in Akorn’s near term performance.  The Court found disclosure of a lower projection already constitutes disclosure of the company’s opinion that the company will earn lower net income. Plaintiffs did not explain why the specific net income numbers were material to shareholders’ ability to evaluate the merger. Therefore, the Court found a GAAP reconciliation was not plainly material.

The Court also examined the plaintiffs’ other disclosure claims, noting generally that the information was already in the proxy statement, the disclosures were sufficiently clear or that the plaintiffs settled the case without the disclosures being made.

The Court found that the disclosures sought in the three complaints at issue were not “plainly material” and were worthless to the shareholders. The Court noted the plaintiffs’ attorneys were rewarded for suggesting immaterial changes to the proxy statement. Akorn paid plaintiffs’ attorney’s fees to avoid the nuisance of ultimately frivolous lawsuits disrupting the transaction with Frensenius. The settlements provided Akorn’s shareholders nothing of value, and instead caused the company in which they held an interest to lose money. The Court expressed its view that the quick settlements obviously took place in an effort to avoid the judicial review the decision at hand imposed. According to the Court, this is the “racket” described in Walgreen, which stands the purpose of Rule 23’s class mechanism on its head; the Court stated this sharp practice “must end.”

The Court stated plaintiffs’ cases should have been “dismissed out of hand.” Since the Court failed to take that action, the Court exercised its inherent authority to rectify the injustice that occurred as a result.  The Court abrogated the settlement agreements and ordered plaintiffs’ counsel to return to Akorn the attorney’s fees provided by the settlement agreements.

In Chester County Employees’ Retirement Fund v. KCG Holdings, Inc. et al the Delaware Court of Chancery considered the interplay between the Corwin and Revlon doctrines. In July 2017, Virtu Financial, Inc. (“Virtu”) acquired KCG Holdings, Inc. (“KCG”) for $20 per share. A former KCG stockholder alleged KCG’s directors failed to maximize value for the KCG stockholders in negotiating the merger.

In April 2017, Virtu made its best and final bid of $20 per share. Every director except for KCG’s chief executive officer, Daniel Coleman, approved a $20.21 per share counteroffer. Coleman told the board that a $20.21 counteroffer was “too low” and that a contemplated restructuring plan would create 25% more value than KCG’s offer. Still, Coleman promised that he would support the merger if he could negotiate a satisfactory compensation and retention pool for himself and his management team.  According to the Court, Coleman’s desire to obtain compensation for his management team conflicted with the KCG board’s obligation to maximize consideration paid to the KCG stockholders. Despite this conflict, the board authorized Coleman to negotiate simultaneously the compensation pool and deal price. In the end, KCG rejected the $20.21 counteroffer and Coleman negotiated a compensation pool to his satisfaction. Then, the KCG board—including Coleman—approved a $20 per share price.

The plaintiff commenced litigation claiming, among other things, that the director defendants breached their fiduciary duties in negotiating and approving the merger. The Court examined the allegations in the complaint on a motion to dismiss.  The defendants argued that the merger was subject to the deferential business judgment standard of review under Corwin because it was approved by a majority of KCG’s stockholders in a fully informed, uncoerced vote.

The Court rejected the defendants’ arguments that the stockholder vote was fully informed.  Corwin was therefore inapplicable and plaintiff’s claims were subject to the Revlon standard of review.  The Court explained under Revlon:

  • directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there;
  • directors must maintain ‘an active and direct role in the context of a sale of a company from beginning to end:
  • part of providing active and direct oversight is becoming reasonably informed about the alternatives available to the company;
  • another part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management, and their advisors.

The Court noted KCG’s charter contained a provision exculpating the director defendants from liability for monetary damages for breaching their duty of care.   Therefore the plaintiff must plead a violation of the duty of loyalty or good faith to avoid dismissal of its claims against the director defendants.  To meet this standard, the plaintiff argued that the majority of the director defendants acted in bad faith by failing to cabin Coleman’s conflict.

The Court found the complaint adequately alleged that Coleman’s interest in negotiating the compensation pool gave rise to conflicts during Coleman’s negotiations of the deal price. The director defendants knew of these conflicts and also knew that Coleman was willing to make them paramount to negotiating a higher deal price. In fact, plaintiff alleged that Coleman told the Board that “if Virtu were to be agreeable with providing comfort on the closing risks, particularly personnel risks and the retention pool, he would work diligently in support of the Board’s decision to see the transaction successfully through closing.”

Rather than cabining Coleman, or limiting his authority to negotiations over the compensation pool, the full Board authorized Coleman to negotiate both the compensation pool and the deal price. KCG’s Board Chairman Charles E. Haldeman, Jr. expressly instructed Coleman to “get the comp issue resolved and then you can resolve the price issue.” This suggested an understanding that success on the compensation issue might position KCG to give on the price issue. Once Coleman secured the compensation pool that benefitted the officers and directors, the Board agreed to the $20 per share price. Although Virtu had rejected the Board’s counteroffer of $20.21, once the negotiations for the compensation pool were finalized, Haldeman was happy.  Upon learning from Coleman that he had resolved the compensation pool issue with Virtu, he responded: “[G]reat news. Thank you for your understanding on this. The Board is very appreciative on this.”

According to the Court, the Board then permitted Coleman to revise the KCG projections downward, which made the $20 per share merger price look more attractive. The plaintiff alleged that the Board approved the revised projections at Coleman’s request, without any deliberation, over email, and the night before receiving a financial advisor’s fairness opinion.

The court stated the plaintiff’s allegations make it reasonably conceivable the KCG board placed the interests of members of management, who benefited from the compensation pool, above the interests of the stockholders. Citing precedent, the Court stated “A failure to act in good faith may be shown . . . where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation[.]”  The Court found the complaint supported an inference of bad faith, and stated a non-exculpated claim because it was reasonably conceivable that the director defendants placed management’s interests ahead of their obligation to maximize stockholder value.

FASB has taken a major step towards approving accounting relief for companies required to modify contracts as a result of new global reference rates which are expected as a result of the expected transition away from LIBOR.

The Board tentatively decided that for a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This decision applies to loans, debt, leases, and other arrangements.

With global capital markets expected to move away from LIBOR towards more transaction-based reference rates, the FASB launched a broad project to address potential accounting concerns expected to arise from the transition. Additionally, in late 2018, the FASB added the secured overnight financing rate—or SOFR—as a permissible benchmark rate for hedge accounting purposes.

In Marchand v. Barnhill et al the Delaware Supreme Court overturned the Court of Chancery’s decision to dismiss a complaint asserting a Caremark cause of action for failure to state a claim.  The case involved Blue Bell Creameries USA, Inc., one of the country’s largest ice cream manufacturers.  Blue Bell suffered a listeria outbreak in early 2015, causing the company to recall all of its products, shut down production at all of its plants, and lay off over a third of its workforce. Three people died as a result of the listeria outbreak.  The Court of Chancery held that the plaintiff did not plead any facts to support “his contention that the [Blue Bell] Board ‘utterly’ failed to adopt or implement any reporting and compliance systems.

The Court noted that under Caremark, a director may be held liable if she acts in bad faith in the sense that she made no good faith effort to ensure that the company had in place any “system of controls.” Using facts discovered as a result of a books and records demand, the Court noted the complaint fairly alleged that before the listeria outbreak engulfed the company:

  • no board committee that addressed food safety existed;
  • no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;
  • no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed;
  • during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;
  • the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
  • the board meetings were devoid of any suggestion that there was any regular discussion of food safety issues.

The complaint also alleged that after the listeria outbreak, the FDA discovered a number of systematic deficiencies in all of Blue Bell’s plants—such as plants being constructed “in such a manner as to [not] prevent drip and condensate from contaminating food, food-contact surfaces, and food-packing material”—that might have been rectified had any reasonable reporting system that required management to relay food safety information to the board on an ongoing basis been in place.

The Court found the complaint supported an inference that no system of board-level compliance monitoring and reporting existed at Blue Bell. When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.

The defendant directors argued that by law Blue Bell had to meet FDA and state regulatory requirements for food safety, and that the company had in place certain manuals for employees regarding safety practices and commissioned audits from time to time.  The Court rejected this argument noting that while Blue Bell might have nominally complied with FDA regulations that did not imply that the board implemented a system to monitor food safety at the board level.

It is important to note that the Court did not find that any of the defendants were involved in wrongful conduct, only that the Complaint survived a motion to dismiss.

The FTC published its views on divestiture packages used to obtain clearance under the HSR Act.

According to the FTC:

“Before putting pen to paper, parties should discuss with Bureau staff what assets, rights, and personnel should be included in the divestiture package. For instance, assets outside the market of concern may be necessary for the divested business to be competitive and viable, and may need to be included in the divestiture package . . .

Rather than expediting an approvable outcome, parties who skip the preliminary discussions and present signed documents may complicate staff’s analysis of the parties’ proposal and prolong, rather than shorten, the vetting process. Additionally, the Bureau may insist on revisions to the executed agreements or the scope of the proposed divestiture, and may reject the proposal completely. For this reason, it is generally much easier and more efficient to negotiate with draft documents than signed, “final” deal documents that will likely need to be modified and amended.”

The FTC also published two guides expressing its views on divestitures.  One is for acquirers of the target company and the other is for buyers of divested assets.

In Howland Jr. v. Kumar et al the Delaware Court of Chancery addressed the alleged spring-loading of options in connection with the repricing of options when considering a motion to dismiss.

In that case, a stockholder of Anixa Biosciences, Inc. challenged the 2017 repricing of stock options held by Anixa’s directors and officers. The repricing occurred shortly before those directors and officers publicly announced news of a key patent’s issuance to a subsidiary of Anixa. According to the plaintiff, Anixa’s directors and officers timed the repricing to precede the public announcement of the issuance so as to effectively “spring-load” the options for the benefit of the directors and officers.

At the time the repricing occurred, Anixa’s Board of Directors was comprised of Chairman, President, and CEO Amit Kumar and four outside directors—Lewis H. Titterton, Jr., Arnold M. Baskies, John Monahan, David Cavalier and Dale Fox.

On August 3, 2017, Kumar and Anixa’s Senior Vice President of Engineering, John A. Roop, received an email from Anixa’s outside patent counsel regarding a pending patent application. The email stated that “the patent will issue on August 22, 2017” and be assigned “U.S. Patent Number 9,739,783” (the “’783 Patent”).  The USPTO in fact issued the ’783 Patent on August 22, 2017.  The Board did not immediately announce this information to the public.

At the time, stock options held by Anixa’s directors and officers were underwater. The Board under Kumar’s leadership called a special meeting of the Compensation Committee to consider “a proposal to re-price certain issued and outstanding stock options for all of the current officers, directors, and employees of the Company.”  The special meeting was held on September 6, 2017. Two of three committee members, Titterton and Baskies, were present and constituted a quorum. Kumar and Anixa’s Chief Operating Officer and Chief Financial Officer, Michael J. Catelani, also attended the September 6 meeting. At the meeting, the Compensation Committee approved the repricing of 2,029,600 stock options to $0.67, the closing price for Anixa stock that day (the “Repricing”). The original strike prices ranged from $0.82 to $5.30. Nearly 95% of the repriced options belonged to Anixa directors or officers.  All of the Board member at the time of Repricing held options that were repriced.

Anixa publicly disclosed the Repricing on September 8, 2017.  On September 18, 2017, Anixa issued a press release publicly announcing the issuance of the ’783 Patent (the “September 18 Press Release”). The September 18 Press Release allegedly affected Anixa’s stock trading price and volume significantly. On September 15, 2017, the trading day before the September 18 Press Release Anixa’s stock price closed at $0.69 with a trading volume of 209,959. On September 18, Anixa’s stock price closed at $1.28, with a trading volume of 22,764,730, up by approximately 85% and over 10,000%, respectively, from September 15.

The Complaint named as defendants: directors Kumar, Titterton, Baskies, Monahan and Fox and current officers Roop, Catelani, and Vice President of Engineering Campisi (together, the “Individual Defendants”).  The Complaint alleged that the Individual Defendants breached their fiduciary duties by withholding from the public news of the ’783 Patent’s issuance, so as to allow the Individual Defendants’ stock options to be repriced prior to announcing the patent’s issuance.

Giving Plaintiff the benefit of all inferences to which he was entitled at this stage, the Court found  that  it was reasonably conceivable that each of the Individual Defendants (other than Campisi) breached their fiduciary duty of loyalty by misusing corporate information and processes to benefit themselves rather than Anixa. Moreover, because Titterton and Baskies approved their own compensation under the Repricing, rendering themselves interested in the transaction, the entire fairness standard of review applied.

The Court noted it was reasonable to infer from the Complaint that the Repricing was the product of an unfair process.  The Court also noted the Complaint alleged that the “timing, structure, and disclosure of the 2017 Re-pricing were unfair.” According to the Court, Plaintiff had adequately alleged facts sufficient to support an inference that Titterton and Baskies had knowledge that the ’783 Patent would issue and repriced stock options in advance of Anixa publicly announcing this information to benefit from any resulting stock surge.

Accordingly, the motion to dismiss for breach of fiduciary duty against Kumar, Titterton, Baskies, Monahan, Catelani, Roop and Fox was denied.  The Court then turned its attention to defendant Campisi.  The Complaint’s individualized allegations regarding Campisi were limited to a single paragraph, alleging that Campisi was the Vice President of Engineering of Anixa, a member of Anixa’s management team, and that he personally benefitted from the Repricing. Rather than plead the role Campisi played in the events at issue, the Complaint lumped Campisi in with the other Individual Defendants. The Complaint provided no basis from which to infer knowledge of the patent issuance prior to the Repricing, involvement in the decision to withhold news of the patent issuance, or involvement in the Repricing by Campisi. Because there are no well-pled facts sufficient to suggest any wrongdoing by Campisi, Plaintiff’s breach of fiduciary duty claim as pled against Campisi was dismissed.

It is important to note that the Court did not find that any of the defendants were involved in wrongful conduct, only that the Complaint survived a motion to dismiss.

In July 2015, Toshiba Corporation (“Toshiba”) revealed that it had overstated its profits by billions of dollars. As a result, Toshiba implemented a plan to sell a subsidiary to Canon Inc. (“Canon”). In March 2016, Toshiba sold to Canon its subsidiary Toshiba Medical Systems Corporation (“TMSC”), and Canon paid Toshiba $6.1 billion without making a filing under the HSR Act.

Canon and Toshiba agreed to pay $2.5 million to settle charges for violating the HSR Act.

According to the complaint, Toshiba needed to recognize the proceeds from the sale before the end of its fiscal year on March 31, 2016. However, Toshiba failed to resolve the TMSC sales process as the end of its fiscal year approached. As a result, in early 2016 Toshiba faced a time frame that would make it difficult, if not impossible, to file premerger notifications and receive the necessary premerger clearances in several jurisdictions, including the United States. Eventually, in early March 2016, Toshiba and Canon devised a plan to enable Canon to acquire TMSC, allow Toshiba to recognize the proceeds from the sale by the close of its fiscal year, and avoid filing the notification and observing the waiting period required by the HSR Act.

The complaint alleges that during March 15-17, 2016, in a multi-step process, Toshiba, transferred ownership of TMSC to Canon, but in a way designed to evade HSR notification requirements. First, Toshiba rearranged the corporate ownership structure of TMSC to make the plan possible: it created new classes of voting shares, a single non-voting share with rights custom-made for Canon, and options convertible to ordinary shares. Second, Toshiba sold Canon TMSC’s special non-voting share and the newly-created options in exchange for $6.1 billion, and at the same time transferred the voting shares of TMSC (a $6.1 billion company) to MS Holding Corporation (“MS Holding”) in exchange for a nominal payment of nine hundred dollars. Later, in December 2016, Canon exercised its options and obtained formal control of TMSC’s voting shares. MS Holding was a special corporation formed by Toshiba and Canon to implement the plan.

The complaint further alleges that the transactions masked the true nature of the acquisition. When Toshiba sold its interests in TMSC, while nominal voting-share ownership was divested by Toshiba and passed to MS Holding, true beneficial ownership passed to Canon. MS Holding bore no risk of loss, and no meaningful benefit of gain, for any decrease or increase in TMSC’s value. Rather, it was Canon which bore that risk or would realize any potential gain from TMSC’s operations. MS Holding merely served to temporarily hold TMSC voting securities for Canon’s benefit. Therefore, according to the complaint, Canon became the owner of TMSC in March 2016 when it paid Toshiba the $6.1 billion purchase price for the company. Thus a pre-filing notification was necessary under the HSR Act.

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.