## Facts

- Kik Interactive Inc., a technology company operating the Kik Messenger app, faced significant financial strain in 2017 and sought funding for a new blockchain-based project.
- Kik created a digital token called “Kin” and promoted a planned “Kin ecosystem” in which Kin would be used to buy and sell goods and services and incentivize developers.
- Kik conducted a two-part fundraising effort in 2017:
  - A presale to accredited investors under purchase agreements, with a Form D filed asserting a Regulation D exemption.
  - A public “Token Distribution Event” marketed broadly, including to U.S. purchasers.
- Kik distributed Kin to both presale and public-sale purchasers on September 26, 2017; at distribution, the Kin ecosystem was largely undeveloped and Kin had no meaningful consumptive use.
- Kik raised about $100 million in value, including more than $55 million from U.S. investors.
- Kik’s promotional materials emphasized that Kin could increase in value as the ecosystem developed, that sale proceeds would fund Kik’s development work, and that Kik’s large retained reserve of Kin aligned its incentives with purchasers.

## Issues

1. Whether Kik’s offers and sales of Kin constituted offers and sales of “securities” as “investment contracts” under the Howey test, triggering Securities Act Section 5 registration requirements.
2. Whether the presale and public Token Distribution Event were an integrated offering, defeating reliance on a private-offering exemption for the presale.

## Decision

- The court granted the SEC’s motion for summary judgment and denied Kik’s cross-motion.
- The court held that Kin was offered and sold as an investment contract and therefore a security.
- The court held the presale and public sale were a single integrated offering.
- The court held Kik violated Securities Act Section 5 by offering and selling securities without an effective registration statement and without a valid exemption.

## Legal Principles

- Under Howey, an “investment contract” exists where there is (1) an investment of money (or other valuable consideration), (2) in a common enterprise, (3) with a reasonable expectation of profits from the efforts of others, assessed based on economic reality at the time of the offer and sale.
- “Common enterprise” may be shown through horizontal commonality where proceeds are pooled and purchasers’ fortunes are tied to the success of the venture and token value.
- A token’s label as “currency” or “utility” does not control; marketing, functionality at sale, and reliance on issuer efforts determine whether purchasers were led to expect profits.
- Claimed consumptive intent by some purchasers does not defeat Howey where the token lacks practical use at sale and the offering is primarily presented as an opportunity to profit from issuer-driven development.
- Separate sales may be treated as one integrated offering when they reflect a single plan of financing, involve the same asset, occur close in time, and share the same purpose and use of proceeds; integration can negate reliance on a private-offering exemption.
- Section 5 imposes strict liability for unregistered offers or sales of securities in interstate commerce unless an exemption applies.

## Conclusion

The court concluded that Kik’s Kin sales were an unregistered securities distribution because purchasers invested value in a pooled enterprise with a reasonable expectation that Kik’s efforts would increase Kin’s value, and because the presale and public sale formed one integrated, non-exempt offering requiring registration.


SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169 (S.D.N.Y. 2020)