(CN) – The Securities and Exchange Commission is suing Canadian mobile app developer Kik Interactive Inc. after the company sold 1 trillion digital tokens that the SEC claims were not registered under securities laws.
The creators of the popular messaging app of the same name, Kik sold tokens called “Kin” to more than 10,000 investors netting roughly $100 million USD.
“The definition of ‘security’ includes a range of investment vehicles, including stocks,bonds, and ‘investment contracts.’” The SEC’s 49-page complaint states. “Investment contracts are transactions where an individual invests money in a common enterprise and reasonably expects profits to be derived from the entrepreneurial or managerial efforts of others.”
Though the app may be popular, Kik was never profitable as its business costs have always exceeded the company’s revenue, according to the complaint.
A downturn in app users in early 2017 caused a financial issue for Kik, as the company anticipated it would burn through all of its cash to fund operations by the end of 2017. A Kik board member called the last minute sale of Kin tokens a “hail Mary pass” to fund company operations and future ventures, the SEC claims.
“Throughout its Kin promotional campaign, Kik also declared that the company would share with buyers a common interest in profiting from Kin’s success,” the commission claims. “In addition to selling one trillion tokens through its then-ongoing offering, Kik would create and allocate to itself three trillion Kin tokens over a two-and-a-half-year period. Kik told potential buyers that, by allotting 30 percent of the outstanding supply of Kin to itself, the company would align its financial interests with those of other Kin investors.”
Nearly $55 million worth of Kin tokens were sold to investors within the U.S. Prior to the sales, the SEC took notice of the tokens, finding that digital assets like Kin tokens were indeed securities.
Kin tokens are currently traded on unregulated trading platforms at approximately half the value that initial investors paid under the offering. According to the complaint, Kin tokens have traded at “much lower” rates in the past.
The SEC seeks judgment to permanently stop Kik from continuing the sale of its unregistered and unregulated token securities and an order for Kik to “disgorge its ill-gotten gains.”