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SEC sues Kik over $100M ICO in potential crypto bellwether

Two years after Kik raised $100 million in an ICO, the Canadian social messaging startup has drawn the ire of the American regulators.

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About two years ago, during the early days of the bitcoin boom, a Canadian company called Kik launched an initial coin offering that went on to raise $100 million. Now, the SEC has filed a lawsuit accusing the social media startup of conducting an illegal securities offering, the latest step in the regulatory body’s effort to monitor the trading of digital currencies.

Founded in 2009 and based in Ontario, Kik rose to prominence (and raised tens of millions in VC funding) as the creator of a messaging and chat service. It originally had nothing to do with cryptocurrencies.

In May 2017, however, it launched an ICO for a currency called Kin, and over the next four months, Kik sold 1 trillion Kin tokens for a combined $100 million, with most of that cash coming from US investors, according to the lawsuit. Kik didn’t register the ICO with the SEC, and the company didn’t provide the sort of transparent financial information to prospective investors that is required in the US for a traditional public offering. At the time, the company didn’t believe it needed to do so, but the SEC has decided it disagrees.

The lawsuit alleges the ICO was a last-ditch attempt by Kik to stave off insolvency. It says that Kik expected to run out of cash by the end of 2017 and that one board member described the plans for an ICO as a “hail Mary pass” to save the company. By not offering a complete picture of Kik’s financial situation, the suit says the company failed to inform prospective investors about “the most significant factors that made the offering speculative and risky.”

To date, at least, those investors in Kin haven’t got what they hoped for. The price of a token declined nearly 40% on Tuesday after the lawsuit became public, reducing Kin’s market cap to below $18 million. At its peak, in January 2018, that market cap had reached nearly $1 billion, per CoinMarketCap.

The filing of the lawsuit came about a week after Ted Livingston, the CEO of Kik, launched a new effort called “Defend Crypto” that’s seeking contributions from other cryptocurrency enthusiasts to help finance Kin’s showdown with the SEC. Kik also contributed $5 million of its own to the effort. On Tuesday, Livingston took to Twitter to further indicate the company’s intent to challenge the charges:

The lawsuit seems to center on a question that could have widespread implications for the rest of the blockchain industry: Are cryptocurrencies actual currencies, or are they investments? Kik believes the former, and the SEC believes the latter. A fight over the answer is about to begin.

Featured image via Khongtham/iStock/Getty Images Plus

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    Written by Kevin Dowd

    Kevin Dowd wrote The Weekend Pitch newsletter for PitchBook, covering startups, buyouts and the rest of the private market.

    A native of the Pacific Northwest, he’s an alumnus of the University of Washington with a degree in creative writing and journalism. He enjoys books and basketball and, most especially, books about basketball. He feels uncomfortable writing about himself in the third person.

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