Need to Know: Kik’s $5 Million Fund to Fight the SEC

On May 28, 2019, during the Unchained podcast, the co-founder of the social media platform Kik and its cryptocurrency arm Kin Foundation, Ted Livingston, announced the launch of a $5 million fund to fight Kin’s ICO case with Securities and Exchange Commission (SEC).

It is a part of a campaign called the DefendCrypto campaign which is aimed to bring better crypto regulations to the United States.

This bold step hopes to bring a paradigm shift at a time when many cryptocurrency developments have been suppressed in the United States due to SEC’s stubbornness on regulating cryptocurrencies through the restrictive window of the 75-year-old Howey test.

The “Illegal” ICO

The cryptocurrency initiative of the privacy-focused social media entity Kik Interactive Inc. began with a successful ICO that raised close to $100 million for the Kin Foundation, making it one of the most successful ICOs in 2017.

The point of contention revolves around the Kin ICO failing to register with the SEC before the tokens were released for sale. This went against the regulatory authority’s directions to register all “securities” before proceeding to a public sale.

Though most of the crypto community doesn’t adhere to SEC’s stance on cryptos and its attempts to classify all cryptocurrencies as securities, federal authority is after all that — an authority, and it has the right to exercise its power over what it “feels” is wrong.

And so, the SEC didn’t miss to take legal action against the Kin Foundation and its ICO.

The company wasn’t taken in the loop for fraud charges, but for being unable to register themselves with the SEC, which is an indication that the company provided insufficient information to its investors. They warned that the legal recourse might include “a preliminary and permanent injunction, disgorgement, prejudgment interest, and civil money penalties.”

Unfazed by the warning, the Kin Foundation retaliated with a detailed explanation in their Wells Response, pointing out the flaws with the SEC’s approach to regulating cryptocurrencies. It hit hard on its weak understanding of the space and also mentioned the authority’s lazy efforts to regulate the industry.

Stating how oxymoronic the words and action of the SEC has been, Kin’s response read:

“The Chair of the Commission has said repeatedly that the Commission does not want to squelch innovation in the blockchain and cryptocurrency industry or push the development of these promising technologies overseas. But the Commission’s current approach to blockchain and cryptocurrency matters has had precisely those effects.”

In his blog dating back to January 27, 2019, Ted Livingston stated how Kin was a pure currency and didn’t fit the criteria of being a security. Justifying their decision of not registering Kin with the SEC. The co-founder wrote that the Security Exchange Act explicitly states that the definition of a security “shall not include currency.”

The Defend Crypto Campaign

Many stakeholders in the industry have been tight-lipped about the concerns that the Commission’s decisions had raised. To keep businesses brewing, most have bent the way SEC wanted them to.

However, with Livingston taking steps to beat SEC at its own game and forcing the authorities to reconsider the laws regulating the cryptocurrency market, it seems that the crypto industry finally has gotten its Elon Musk-parallel.

On May 28, 2019, during the blockchain and cryptocurrency-focused Unchained Podcast, Livington announced the launch of a $5 million crypto initiative dubbed DefendCrypto.

Kin establishes $5 million https://t.co/siUfXXPZgc fund to take on the SEC. Support from @coinbase, @Circle, @MessariCrypto, @ShapeShift_io, @fredwilson and others. #bitcoin #ethereum #crypto https://t.co/uGt63PCkiZ

— Erik Voorhees (@ErikVoorhees) May 28, 2019

The raised funds would be used to legally challenge the SEC in an attempt to force the authority to create more precise regulations that promote the growth of the crypto space rather than hinder it. It was launched on the major crypto exchange Coinbase’s Custody service and is expected to see participation from a vast number of users.

More specifically, it’s an attempt to either strike out cryptocurrencies from being regulated using the Howey Test, a test to verify if investment contracts qualify as securities or not. Alternatively, the initiative could force the Commission to consider implementing certain modifications to the 75-year-old test to classify cryptocurrencies better.

Kin, so far, has bled a considerable amount of its time and money playing defense against the SEC.

After not seeing any major outcomes, Livingston took the more bold step towards solving the problem. During the Unchained podcast, Livingston said that it was high time people stopped fearing “what will the SEC think” and sail the boat to the crypto revolution.

He further added:

“We are giving ourselves a fundamental handicap to compete on the global stage. Enough is enough, we need clarity, and the only way we’re going to get clarity is if we go to court, so let’s do that.”

As several ideas in the crypto industry are coming to reality across various countries, the United States authorities are still busy determining whether cryptocurrencies should be classified as securities. This is anchoring the growth of the crypto space in the country and giving a hard time to those trying to create top-notch solutions.

The Ramifications

Challenging the financial watchdog over the way it has been governing cryptocurrencies was surely not a game for a young startup.

It also appears that the American crypto industry suddenly has the figure that will go in the ring to take on the challenge to steer things in a new direction.

It’s not just about the Kin co-founder going against the Commission to save his company and its two-year-old crypto initiative either. Many industry players whose companies faced similar troubles due to the same regulations also have high hopes from this case. If they win, it would be a landmark for several projects that would experience a more supportive ecosystem to grow their companies. 

As Anthony Pompliano, a major Bitcoin bull and co-founder and partner at Morgan Creek Digital wrote in his January blog post following the first announcement about Kik taking up the fight against SEC:

“No one knows what the outcome of Kik’s situation will be. Either way, this will be one of the most important legal cases to watch in crypto. The company is well funded, well connected, and you get the sense that they are fighting these potential charges as a way to say “enough is enough” for the entire industry.”