SEC Charges Kik With Conducting $100M Unregistered ICO
sec.gov
sec.gov
"When we looked at raising another round [of VC funding], we asked ourselves how do we answer the question about how we will become a profitable business [...] We didn’t have an answer we really believed."
... so instead they decided to raise money from unsophisticated investors in an unregulated market, where nobody asks such inconvenient questions! No surprise that the SEC is upset.
You literally can't make this any easier for the SEC. There's not much of a defense when you repeatedly admit that you're attempting to raise money by issuing something you market as an investment opportunity.
There are other ways of addressing fraud besides violating people's right to freely contract with other consenting adults, like punishing those who commit fraud to deter others from committing the crime, and public education campaigns.
The idea that the government has a right to deem a certain class of investors as "unsophisticated", and thus better off deprived of the right to decide for themselves what to invest in, and prohibit an entire class of interactions, on the basis that too many instances of that class are fraudulent, upends basic principles of liberal society.
The poorest households in the US spend 9% of their income on lottery tickets, showing that you can't legislate people out of misusing their funds. If anything, the attempt to do so deprives them of better investment opportunities, and better opportunities to learn how the investment world works.
And this isn't free market idealism. The crypto/token investment market has become vastly more sophisticated over the last 4 years. Token sales that would have raised millions 4 years get nothing today. People need to have a bit more faith in other people, and in freedom.
Kik is choosing not to become a “public” company in that they don’t want to file disclosures. They’re trying to circumvent the rules that show they’re operating above board.
can being the operative word. There is a very significant market for investments where "sophisticated" – er – Accredited Investors get access to purchase securities that are not available to the public.
Frustration from people who want to but cannot access this market is real and arguably valid, a balancing act between preventing fraud and granting access which is tipped a bit too far towards not necessarily preventing fraud but restricting access for the benefit of a few. (on the other hand before you go public there is a benefit to only having investors that really know what they are doing, the rabble of small time less knowledgable investors can be a business risk before your company is ready for the public)
What I am saying is that the people spouting nonsense come from a place where there is truth, but so many people know so little about it that good discussions are hard to come by.
The reality is if you’re a high profile founder with a great idea and traction you can get money from mostly everyone while maintaining a nice clean cap table. If you aren’t, you then raise from “suckers” (see the ICO market).
It's as though some of the libertarian leaning commenters think these rules were brought in because the government was tired of seeing so many poor people become wealthy. The reality is the government was tired of seeing so many poor people get rekked and thrown into the welfare system, what little of it there is here.
tl;dr: getting rich isn’t easy and deregulation is likely to cause more harm than good.
So us, poor unsophisticated plebs, can’t invest in anything until post IPO. Which seems to be way after the majority of the gains have been captured.
Ironically people are trying to build fully automatic DAOs, such that the use of funds is fully transparent. Effectively baking in the reporting into the organization.
And also after the point where most of the failed companies have collapsed. Don't let survivorship bias run your investment decisions.
“The poorest households in the US spend 9% of their income on lottery tickets, showing that you can't legislate people out of misusing their funds.”
You’ve explained why it’s urgent that we outlaw lottery tickets. For most of USA history Protestant and Catholic leaders were unified in their opposition to all forms of gambling, and so lottery tickets were unthinkable for most of USA history. And every progressive activist that I know personally would like to see an end to lottery tickets and other forms of de facto regressive taxation. Lottery tickets, like other forms of gambling, tend to undermine habits of thrift and sobriety.
I agree with your implied analogy — ICOs are like lottery tickets. That’s why they should be banned.
Not all of them, though maybe nearly all of them.
There is nothing at all wrong with using a crypto-system to distribute ownership of your business. The SEC is actively working to make this a reality. It is just a different market to do the same thing.
There is however so very much wrong with doing this outside regulation. Black market shares of your company are bad. Making up the nth new coin and selling its nonsense to the unwise in pump and dump schemes is wrong. In order to do so legally you have to be extraordinarily careful to completely divorce yourself from the US financial system and doing business on US soil.
Banks themselves are starting to use crypto-coins to operate. They're just a tool, when used in the right way they aren't an exciting anarchist revolution usurping The Man, they're just a different sort of database/API. JPMorgan is setting something up for business-to-business transactions because they think it could be a better replacement for the current complex frameworks they have for keeping track of money.
Most ICOs are like bad lottery tickets, but it's not the technology underlying it at fault.
Actually in most countries lotteries are pretty heavily regulated to ensure that they are indeed redistributing a share of ticket sales as winnings and are also fairly selecting winners. ICOs are like unregulated lotteries that might intend to keep the proceeds from all "investments" to themselves and/or unfairly distribute to insiders like the "influencers". Opportunity makes a thief.
Imagine if anyone could buy $5 worth of stock for the product they're buying at 7-11. Over-time these small purchases would let them amass a sizeable base of assets, and all the while they'd have a stake in parts of the real economy, which would incentivize them to invest time in learning how it works. The educational value alone would be enormous.
Instead we foolishly prohibit people from participating in many of the most lucrative sectors of the economy, which corrals them into low-value dead-end activities like playing the lottos. If you want someone to grow, you don't over-protect them. That applies to raising children, and it applies to governance of the public at large.
Counterpoint: The government declares which investors are savvy or not ("accreditation" based on the rules) only partly because they believe certain people are unqualified to make certain investment decisions based on knowledge. The other major factor is whether an investor is more likely to lose amounts material to their survival.
Two items to consider:
1. A person making enough spare income to take such risks is someone who likely won't suffer nearly as much if the risk goes south. Someone making 200,000/y (ok, excluding SF/NY since apparently legislators hardcoded a value like idiots) or who has 1mil assets after the primary home will probably feel pretty bad if a 25,000 investment goes to zero, but they probably won't be going on public assistance.
2. That said, regarding qualification to actually make the decision, a person who has the net worth or the income flow to qualify for accreditation may also be in a better position to invest in concepts being developed by people with past track records or increased odds of success. This may be a general result of being connected to such people (what you might call "the old boys' club," but this can broadly apply to any network of people) or may simply stem from being better positioned to evaluate/diligence the concept e.g. because they're applying their specialized knowledge to evaluate a new idea which they feel has value.
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Idealism is one thing, but if you're more likely to be preyed upon because you don't have the knowledge or connections to make more informed investment decisions and are more willing to increase the tax burden on your fellow person as a result of investment decisions gone sour, that's where the government steps in to protect the general population.
As a reminder, this is one of the few responsibilities the government actually has in any society, even the most libertarian.
Anyway, this isn't really a debate. If you disagree, you're empowered to do what you wish; I've made my counterpoint above and don't intend to go further.
You're just rewording what I said.
What you're promoting is based on a principle that is roundly rejected when applied in every other sphere of life.
>>As a reminder, this is one of the few responsibilities the government actually has in any society, even the most libertarian.
Protecting people from their own bad judgement is not a responsibility that the government has in a free (libertarian) society.
That's why we let people read whatever literature they want, no matter how toxic the ideas it promotes, and to eat as much as they want, exercise as little as they want, engage in as much unprotected sex as they want, and drink and smoke as much they want.
When it comes to crime, the government does have a role in protecting people, but the way it traditionally protects them is by intervening when someone reports a crime in progress, or punishing individuals after they've committed a crime, to create a deterrent effect, not by prohibiting people from venturing into dangerous areas of the city, or prohibiting certain types of relationships that are more likely to lead to criminal incidents.
Preemptive restrictions applied to innocent people is not how crime is addressed in a free society.
I don't know where you get your ideas of what libertarians are or aren't but, the general basis of libertarianism is that government gives your recourse for physical harm, defrauding via lies of commission (on principle and independent of the individual's ability to protect themselves), and typically property rights (though libertarians often disagree why). Generally the truth is considered to be an absolute defense against an accusation of fraud, and the justification of fraud is not a function of government having to 'bail people out', and in general, libertarianism does not consider it the role of government to "protect the general population". Typically, libertarians believe this under the premise that so often governments have done (and continue to do) shady things under the "guise of protecting the general population".
You might liken an underground ICO to a bug chaser party where some participant doesn't even know what that is.
That kind of stuff is a real problem, and there are plenty of scenarios where government prohibition isn't overstepping. In those cases, we're not protecting you from yourself, but rather protecting everyone else from you and your poor decisions that make your misfortune a burden to society.
if they had raised money by telling a story that they didn't believe to the VC's to raise money from the VC's, then they would have been guilty of something by their own words: but they didn't, and their point in saying that was they did not do that. Instead, they pivoted...
The money they raised in the ICO has the SEC upset, but not for the reason your example refers to, but simply for lack of registration.
It is also the scammers fault for scamming, and they face their own set of consequences.
I also think there is this bizarre double talk on HN where people say sophisticated investor status shouldn't be a thing while also condemning ICOs, which is exactly what happens when sophisticated investor status isn't a thing.
It's a misnomer because it implies there is some kind of knowledge or skill threshold required.
What it really means is "has enough money they can afford to lose some".
In reality, there are plenty of people who have tons of money and not a clue how to invest it well.
It's not. "Accredited investor" is the official term. "Sophisticated investor" is a higher finance-colloquial bar, typically requiring one follow institutional best practices (e.g. legal and risk reviews).
Who even bought this stuff? Doesn't this throw up all the red flags of a scam ICO?
A buddy of mine from my home town called me up and needed a developer to work on his "crypto-currency hedge fund." This guy has always been a bit dodgy on looking for the least amount of resistance to the most money.
I tried tell tell him all the reasons it was a bad idea. He claims he had done all the research (guy is not a programmer, couldn't pass Anatomy I the two times he took it in an attempt to start his career as a radiologist .. for the money -- sure as hell couldn't do the maths).
He told me investments would be a minimum of $250k and he was promising (yes promising) 120% returns. ... I told him he needed to be careful, because with that type of pitch, he would most likely end up in a ditch somewhere two to to the head .. or jail .. and he should hope for jail.
Besides telling him it was a bad idea, I told him he couldn't afford me. He told me he'd pay more than whatever I was making. I told him what I made .. and that I wouldn't take anything in crypto currency. That ended that.
He had several tens of thousands in different crypto currencies (before the BTC bubble broke in 2018). So in response to your question: this kind of person.
I'm no lawyer, but it certainly seems like Kik worked to circumvent these laws in order to raise a bunch of money to keep their business alive. I look forward to seeing where the SEC investigation/trial goes.
Which is counterproductive, really. Natural selection is the only effective cure for stupidity known to the mankind. Stupid people should be allowed to make stupid mistakes and suffer all the consequences.
What’s amazing is they raise nearly $100M selling the token, spent $5M in legal fees and then began raising additional legal fees (over $5M to date) from the public to continue to fight the SEC and anticipation of future litigation with the SEC.
They raised $100M and can’t be bothered to use that for their own legal fees...And the public is apparently happy giving them millions more, it’s insanity.
I believe it was Einstein who defined insanity as performing the same task over and over and expecting different results.
If you invested/bought Kik because you wanted a “position” to make money on it, then it fits the definition of a security, so by throwing more money to fight the SEC to claim it’s not a security is a losing battle by your own “position”.
The real irony is that the Kik token probably was structured as a non-security utility token, it’s only the CEO statements/marketing of the token as something that will become extremely valueable to investors that will come back and haunt them.
Not Einstein. It's a quote from a 1981 Narcotics Anonymous pamphlet.
Look at all the payment integrations that've been added to platforms like Facebook lately. It isn't cryptocurrency, but the idea seems to be pretty similar.
I think the SEC is interested in the conditions around their ICO, the misleading tactics, and the aftermath of it, more than the fact that they did an ICO
That is not to say, this is the only kik users, it's just the only instances I anecdotally saw people advertise their kik handles, and it didn't leave a good impression. This ICO stuff made me think of that.
Myself, for a long time I believed tech startups are micro-R&D for new technologies. Couple years of HN and in the local startup community later, I finally realized that a lot of Internet startups tend to turn investor money into business model R&D - i.e. ever more innovative ways to break an existing market and siphon off enough wealth to get flipped and net the founders FU money. Regular people don't know any of that; they don't understand how the game is played, or why - they only enjoy free web services and cheap pirate taxi rides.
They were from about 1970 to 1998. Then came the dot-com boom.
During that period, most VC firms made money. Now, VC funds as a a class are a net lose.
It seems like you might of repeated yourself...
This is the cryptocurrency roosters coming home to roost, no?
According to the SEC it was also an illegal offering of a security, and its receiving special treatment bc they considered it to have matured and no longer be considered a security, therefore grandfathered its grandfathered in unlike any other ICO.
No one else is going to have the good fortune of being able to offer an unregistered security then mature into a non-security with the SEC acting first.
Name a non-ICO-infrastructure ICO that isn’t a scam.
Quick search of “ethereum escrow” returns no real implementations that avoid fees or human intermediaries. Every single blog post I’ve read that tries to sketch an alternative is incredibly poorly thought through and still vulnerable to fraud. That is why they are just blog posts and not real, not because it’s “still early days.” I think it’s fair to say trustless escrow is vaporware.
There are projects with a very high potential to provide those building blocks in development right now, like Matter Labs' use of zero-knowledge proofs to scale Ethereum:
But yea it's all very speculative right now. I speculate it will work, but it'll depend on what the various players in the industy actually accomplish.
Ethereum is the reason there have been so many ICOs in the past 3 years.
Are most ICO's scams? Yeah sadly. Are there lots of scams on Kickstarter/indiegogo/etc? Yes sadly.
But an ICO itself isn't necessarily a scam (although I concede 99% of them are)
The problem is that most of them are run by scammers, which do promise profit.
In an ICO, I get a... theoretical security? A kik kin coin that may or may not have value?
You don't back an ICO because its "value will go to the moon", you back an ICO because invents a new way for -- Creators to get paid instead of using advertisements, creative ways to organize some kind of distributed system.
The scam comes from them not completing their promises and leaving with the money and no "product". The coin's value is irrelevant (as long as it isn't 0)
A lot of 'investors' are firm believers in the Great Fool theory of investment. Basically they are completely aware that it is a scam, they're just banking on the fact that they can get in, take some profit, and get out before the rest of the world catches on that it is a scam.
Is that a good or bad thing?
There was a short period of time when there was immense profits to be had from buying and quickly flipping obvious scam ICOs.
Probably if they had invested in the right lobbyists and the right lawyers, they would have been able to engineer a level of indirection that this wouldn't have attracted attention.
Maybe they actually have, and will lose this case as millionaires.
My guess is that a lot of this money is dirty. There are also tax reasons, where money needs to be invested or is even expected to be lost.
I personally feel that rando cryptocurrency vs Uber post IPO has similar alpha, but obviously quite different beta.
North Korea probably.
> 167. [...] Kik declined to sell Kin to investors from certain countries, including Canada, China, Cuba, and North Korea.
AFAICT many/most ICOs operated like this. Not all, certainly but the "raise money through hype about future values, with products far off or non-existant" model appeared to be the dominant one in '17 and '18.
> Eileen Lyon, Kik's General Counsel commented, "For the reasons set forth in our Wells Submission, the SEC's complaint against Kik is based on a flawed legal theory. Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a 'common enterprise'; and that any contributions by a seller or promoter are necessarily the "essential" managerial or entrepreneurial efforts required to create an investment contract. These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny."
https://www.prnewswire.com/news-releases/kik-responds-to-sec...
https://unchainedpodcast.com/kin-sets-up-5-million-defendcry...
I know a lot of other actions around the country are pushing the limits, hoping to get a favorable ruling and establish precedent (see: case vs. ACA being unconstitutional).
Is encoding a set of account values into a genesis block posted on GitHub a security offering?
They're so fucked. Good riddance.
The SEC usually acts but the penalties are usually for 1/100th of the profits.
If Kik loses here they're just going to make them pay $1M 'penalty' and move on.
>The SEC seeks a permanent injunction, disgorgement plus interest, and a penalty.
So they're seeking $55,000,000 USD of US investor funds, plus interest, plus a penalty.
That would bankrupt Kik and decimate the future of the project.
People with skin in the game clearly think it's a big deal. Kin's price tanked by 25% today, and that's after a long decline since the Well's notice. That trading volume is telling too. They turned over about 10% of the outstanding shares. By comparison, a typical day for GOOGL is 0.5%.
I'm not saying the company should be bankrupted, but it has to hurt them enough that they wouldn't want to risk trying again.
As for their being no legal way to rob a bank, there are a whole bunch of folks from the 2009 mortgage crises who would beg to differ.
9-120.000 - ATTORNEY FEE FORFEITURE GUIDELINES
Not many folks say "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court!"
A number of smaller ICOs just settled with the SEC and refunded the money to investors when they got a Wells Notice. Those are all the folks who said "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court." Kik is different in that they have deep pockets, strong legal counsel, and a product that's been out there for 8 years.
Except they don't. The only money they have is from an unregistered sale of securities which was only undertaken because they HAD NO MONEY. Their product costs more to run than it makes, and is irrelevant to the SEC lawsuit.
Lawyers know that they cannot be paid with that money. If they lose it will be forfeited. Similarly you can't rob a bank and use the money to pay your lawyer.
> It’s not like anything will happen to the executives.
That's absolutely not true. It's not unreasonable to expect that the SEC might refer people to the DOJ for criminal prosecution and jail time would send a nice signal.
Don't you think this would come out at trial? Sounds like the only reason they came out with an unregistered ICO was in order to generate revenue it needed to continue operating. That's a huge red flag for me if I'm an SEC investigator
>the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens. Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors. The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.
That doesn't really sound like a security to me...
We could have a privacy-oriented chat platform with a cryptocurrency "small cash" type of transaction system built on top. Combined with some informal craigslist style mini-stores, which flourished in China via Wechat.
I'm sure FB/WhatsApp could do it via normal payment channels, probably involving Visa/Mastercard. But the privacy story is awful for such a critical piece of software. Assuming they could pull it off. Maybe Kik could take up the privacy flag?
WSJ made a nice video of how Chinese people live "cashless" via WeChat in Shenzen: https://www.youtube.com/watch?v=75AXINUL47g
No most people don’t raise a $100M in violation of securities law...or even “testing” security laws, especially when Kik could have obtained the SECs opinion through a No Action Letter request.
Why didn’t Kik avail themselves to the law and process before raising $100M from the public?
Patrick Gibbs:
> First of all, you have to consider the SEC’s normal process for that sort of thing. It is very difficult and it takes a very, very, very long time for the SEC to give that kind of forward-looking advice, usually in the form of a no action letter. I mean, here we are in 2019 and they have only just recently released what I think is the very first no action letter relating to a cryptocurrency and that matter has been pending for well over a year.
> So it’s not practicable in a business that’s moving as quickly as this business was in 2016, 2017, to go and ask the SEC for a no action letter like that because the process just takes too long, and in a situation where in our view it’s quite clear that what we were doing is outside the scope of the SEC’s authority, we don’t generally think we have to go and ask the SEC’s permission to engage in business activity that is outside the scope of their authority.
https://unchainedpodcast.com/kin-sets-up-5-million-defendcry...
I empathize with what Mr. Gibbs is saying, and—if he speaks the truth—feeling, but it was Kik's choice to run a "quickly moving business" in a highly regulated arena.
People make the same arguments about security/privacy ("too much of a hassle in a quickly moving startup"), safety ("we can't afford to put two people in this test vehicle for autonomous driving") and so forth.
Kik might be right in this specific case, but in general "We're moving too quickly to deal with red tape" is not an argument.
First your citing the Cooley attorney who advised the company...of course he is going to justify his own legal advice.
It’s not going to look good when the court determines Kik knew if could have sought clarification from the SEC but didnt Because the SEC no Action Letter process wasn’t practical.
Let’s also keep in mind Cooley is the Firm that developed the SAFT (security agreement for future tokens) released their SAFT whitepaper into the wild telling startups to use their SAFT legal framework to raise money with ICOs legally and these are some of the first companies the SEC targeted for enforcement actions.
They threw out some free legal advice and people used it?
I guess you get what you pay for.
I remember the story of the startup executive who thought he maybe got odd advice from his CFO about stock options but was assured that "this is how it is done". He went and asked a local attorney effectively "I don't see how this could be legal."
So they didn't do it, little while later his CFO had to resign, because they were going to jail for doing the same stock option (basically massive back dating) plan at another company.
Bullet dodged!
For anyone curious, I think the parent poster is thinking of Ben Horowitz: https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/
>I guess you get what you pay for.
Then again, Kik, Cooley’s paying client also ended up in an SEC enforcement action (they claim they already spent $5M in legal fee prior to the SEC bringing the case).
I’m not so sure the issue is how much the clients paid for Cooley’s advice so much as the advice itself.
Supposedly Kik did seek clarification from the SEC and didn't get any. Then they received an enforcement action which is supposed to include details about the problems involved and the actions to be taken, but it contained none of those. Since then, they have been working for a year to get any kind of detail from the SEC, and the SEC has declined.
Personally, I think the root problem is that it seems the SEC is wildly under-funded and over-loaded. If a politician ran on a platform of election & campaign-finance reform + fund up the IRS & SEC; you couldn't call me a single-issue voter, but maybe a "2-issue voter" in that dream scenario.
The SEC also enforces gag orders on settlements to hide the proceedings and discovery from the public which only allows them to continue their abuses of the system.
A common thread among SEC settlements, also in CFTC and CTFB settlements is summed up from a recent SEC agreement
"mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis"
So basically you have no recourse against government agencies whose quasi legal status pretty much makes them immune to the checks and balances as specified in courts. If you want a closer to home comparison, FISA courts operate pretty much the same way. There is no disclosure other than what the government wants you to know and they have the full resources of the US government to take you down, the common tactic is to bankrupt individuals or threaten it to get the deals they want.
As for settlements with the terms "mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis", that's what pleading guilty looks like in a civil enforcement matter. You can't say "yes, we did it, and we'll pay the penalty rather than going to trial" to the SEC, and then turn around and say publicly "we didn't do it".
For example, what if Mr. Howey had purchased the orange grove expecting to eat 10% of the oranges and leave the remaining 90% subject to the leaseback agreement originally at issue. Is the orange grove agreement still an "investment contract" if Mr. Howey eats 10%? What if he eats 50%? 90%?
What if Mr. Howey planned to sell all of the oranges when the market price was over $X per pound and eat any oranges when the market price was below that amount?
That's the Howey grey area in which Kin is operating. Many people likely purchased small amounts of Kin with the expectation that they might use some of it for in-app purchases and hold some anticipating a profit from it appreciating in value.
Other cases that have been litigated in the wake of Howey that you might find interesting, though not necessarily helpful in applying Howey to cryptocurrency:
- United Housing Foundation v Forman[1] (1975) where "stock" issued by a housing corporation that provided a reduction in rent was _not_ an investment contract (or security at all).
- SEC v Edwards[2] (2004) where a fixed-rate leaseback agreement for payphones _was_ a security.
- SEC v Lauer[3] (1994) where the court was... flexible in their interpretation of the Howey test, finding a "common enterprise" existed where there was only one investor.
The Lauer opinion was particularly important for demonstrating that courts look to the "economic reality of the transaction" when determining whether something is or isn't a security.
[1] https://supreme.justia.com/cases/federal/us/421/837/
[2] https://www.casebriefs.com/blog/law/securities-regulation/se...
[3] https://www.courtlistener.com/opinion/1459162/ussec-v-lauer/
Interestingly, most of the points you raised (financing innovation, alternative to VCs, etc.) would put tokens such as Kin squarely in the “securities” bucket instead of the “commodities” bucket.
Regulation is coming for cryptocurrency and regulation is needed for cryptocurrency. And the industry would be far better served by working with their future regulators to establish reasonable guidelines rather than fighting them in court.
Regulation is unpopular among the people inside the regulated industry, but it protects society as a whole.
The only industries that really fight regulation are those where there's currently a mad scramble of new startups trying to gain position (see eg. dot-coms in 1999 or crypto in 2019). Nurses don't fight HIPAA, bankers don't fight margin requirements, contractors don't fight building codes, brokers don't fight broker licensing, and daycares don't fight safety standards.
https://www.huffpost.com/entry/auction-2012-banks-lobby-wash...
Corporate lobbying has not been that strong in EU, where SEPA wire transfers are fee and merchant card fees reasonable capped. And now as the latest PSD2 directive the banks must give you an API access to your own bank account.
The US literally created the FDIC because banks are allowed to gamble with depositor's money.
Really, the only example you provided that was correct was that daycares don't fight the safety standards imbued into the day care licensing requirements. (Yes, daycare is a licensed business in most states.)
Generally, regulation is not popular amongst the regulated industry. However, the lack of regulation is far less popular than the fear of unregulated competition in some markets where "startups" try to "disrupt" the status quo by imposing externalities on society rather than absorbing them internally as they would if they adhered to regulations.
The HIPAA regulation is literally just a regulation that minimally impacts their handling of patient data, not their professional practice. Their responsibility is literally to follow the data-protection policies set forth by the facilities they work for.
Technically I was once regulated by HIPAA as well...when working for healthcare clients, with respect to patient data.
Regulations may be a net positive overall but there are plenty of examples of bad regulation. The general case does not necessarily apply to any one case and even if it does there's still plenty of room to screw up the implementation. You can't just hand wave and say "well regulation is generally good so therefore this specific regulation must also be good". That's the same flawed logic as using demographic statistics as if they apply to individuals.
I can't believe I'm defending crypto here.
An "investment contract" is just one of many things that fall within the definition of "security":
> The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations.
To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced.
That guidance has come in the form of a statement for ICO issuers[1], a 'Framework for "Investment Contract" Analysis of Digital Assets'[2], and a statement on cryptocurrencies and ICOs[3]. All three include language along the lines of:
> This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission.
As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security.
Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security."
Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations.
For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations.
[1] https://www.sec.gov/news/public-statement/statement-framewor...
[2] https://www.sec.gov/files/dlt-framework.pdf
[3] https://www.sec.gov/news/public-statement/statement-clayton-...
(I guess the SEC could claim they count as "any interest or instrument commonly known as a security" on the grounds that the SEC themselves consider them securities, but that seems a stretch. I don't know why the courts would have bothered making the Howey test if they just wanted the SEC to rule however it liked.)
Whether something passes the Howey test and is deemed a security is a different matter, but you can "airdrop" a clear security (which certain cryptocurrencies certainly are), and violate Section 5 of the Securities Act notwithstanding the fact that the value to the issuer was not cash.
The airdropped tokens I've seen did none of those things. Someone simply created a token contract and granted initial balances based on the ETH balances of existing addresses. The new owners don't even have to know the tokens exist.
Going through these measures to understand if what you are issuing is a security is not unusually difficult. It does take time, and often requires seeking good legal advice.
The strategy many of the worst ico's used, of trying to write their way around the very real considerations of securities laws, was poorly thought out and now they are paying the price.
There are many instances of projects that went about this the right way, I.e Filecoin, Ocean Protocol, Cardstack.
Eth meets the Howey test. BTc arguably does not due to its manner of distribution and initiation.
https://coincenter.org/link/sec-chairman-clayton-just-confir...
That doesn’t change facts, they simply aren’t going to do anything about it.
Why is that ?
But there is no framework on how exactly one becomes sufficiently decentralized, and because Ethereum had an ICO and is not a security, we know there is a way to do an ICO without needing to be registered. Unfortunately the current regulatory framework is opaque. The SEC "knows them when they sees them" so to speak but cannot explain clearly how to avoid becoming a security.
My hope is that this lawsuit will result in clear guidance on how to become a Bitcoin or Ethereum, which will significantly help boost the industry.
That something could move from "security" to "not a security" in 3 years while preserving the ownership interests of stakeholders should probably tell you that crypto is something new, though, and that existing legal frameworks don't properly capture how it behaves.
https://www.sec.gov/news/public-statement/statement-clayton-...
The press release says that: "the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens."
I'm guessing that they spent a decent amount of the money they raised through the ICO. If they have to give it back, will they have to take on even more funding from a VC at even worse terms?
I think they are far more worried about being referred at this point. Who cares if you have try to pay back ICO investors? As long as you can stay out of prison, any terms are good terms. I suspect a good many people at Kik will be losing property they own, because this will definitely pierce the veil so to speak. But at times like this, only losing personal cash and property is a win in my book.
That seems remarkably optimistic. The two likely options here seem to be dissolution with heavy fines for all involved, or something even more serious than that.
Is the ICO a scam? Yes, it wasn't legal.
"This filing makes it appear that Kik was attempting to scam investors."
Yes. They were. They pretended their ICO wasn't going to break securities law.
Not everything that's illegal is a scam. If somebody sells me cocaine and I'm happy with the product, it's illegal but nobody was scammed.
Legal or illegal according to the laws in what jurisdiction? As international users, we obviously benefit from decisively reining in any American attempt at extraterritorial expansion. That is why, for example, we support the interdiction of American warships in the Black Sea (Russia) and the South Chinese Sea (China). I am waiting for the good news that either of these countries has finally sunk one of these vessels. That will be party time!
To be fair...
Yes Kik did sell them as investments... claiming rising demand would drive up the price of Kin... which did indeed happen.
The kin tokens increased in value over 10x from the price they were sold to investors at. It didn't last, of course.
I still don't understand why they didn't get SEC approval before offering the token sale, however.
They were savvy enough not to allow Canadian investors for that very same reason... because they're a Canadian company and did not want to get mixed up in unregistered securities sales in Canada.
> Kik has agreed to jurisdiction in the United States concerning disputes relating to Kin. When selling Kin to the general public, Kik required investors to agree that all disputes about the purchase and use of Kin would be heard by an arbitrator or court in the United States, specifically in the State of Delaware.
So they should have known. And maybe they did, thinking that if they tried to register with the SEC their fundraise would not be allowed and the company would almost certainly declare bankruptcy; but that if they did not register, even after the DAO report, they'd at least have a chance of sneaking through, and if they were caught, they might avoid personal liability. Many people disobey the law out of desperation, and if nobody goes to jail, then disobedience becomes even more likely for those in such a situation.
That was my best idea as well as to what they were thinking at the time.
Take money now and worry about the consequences later, or go bankrupt now and worry about that now.
Because what they did was illegal and the SEC would never have approved it. To do it legally, they would've had to only sell to accredited investors and there's no way they raise $100m doing that.
I'm not sure what about all of that makes them seem trustworthy. I guess they haven't been caught selling user data - but given that they allegedly committed fraud to keep the company afloat, I don't know why you would trust them not to.
This was before iMessage too, so the group chat and photo sharing capabilities were attractive. Facebook Messenger barely existed, and there was no such thing as Twitter or Instagram DMs.
Their app has barely changed since then and it’s taken new life as an AIM style messenger where you only need to exchange usernames to communicate. It’s bloated, slow, and has features that are stuck in 2013.
[1] https://www.katherinewu.me/writings/2019/6/4/annotated-guide...
You posted a link from 2017
https://a16z.com/2019/05/15/kik-and-the-sec-whats-going-on-a...
Either they provide perfectly clear guidelines or they can screw off.
Anything vague is extremely bad for business as it causes undue risk, confusion, lawyers galore.
Also - timeframes matter. This event took place quite some time ago, it's totally unfair that the process takes this long.
The briefing, roadshow materials, legalese should be presented to the SEC and they should 'approve or not', and if not, then they can be taken to the courts before the ICO so that everything is legal up front.
I'm not one bit empathetic to Kik's ICO, if find it all kind of shady, but that should be made very clear before, not after actions are taken.
Would you prefer - would those companies prefer - being completely ban/blocked from operating until SEC understood it all? I'm guessing no. I'm guessing too that investors would have liked the protection though, as would society in general - those who got drawn in by the shallow hype and lost money.
No need to be redundant.
In some cases people have taken the time to work out a set of incentives that allows a market that previously needed to be operated by a corporate entity to be operated without central control.
Such an incentive scheme has intrinsic value equivalent to the coordinating body it replaces. An ICO for such a scheme is not necessarily a scam.
Certainly the vast majority of ICOs are scams, but not all. The vast majority of beggars sob stories are lies, but not all are. Sometimes someone really is in a tough spot and needs a couple dollars.
Or anything where money is raised for a non-profit organization. Preferably as donations. More transparent this organization the better. Non-profit nature is very good in guarding against my expectation of profit by the work of an issuer.
>Augur's user numbers dropped off sharply after launch in 2018: from 265 daily users in early July, to 37 on 8 August.
Maybe not a scam, but this does not convince me of the value of ICO-backed projects
too few users to even be considered, in my opinion
If one of your examples is a charity fraud scheme masquerading as a crypto-currency start-up [0], I'm not sure you have a very good argument.
Similarly, you can't use a regular currency (like just paying users in dollars, AllAdvantage style) because the value of a dollar is more dependent upon other markets like housing or food than on advertising. If attention is mispriced with that system, the only party who can correct that is Brave, and Brave doesn't has neither the information nor the incentive to set a correct market-clearing price.
(Link discussing Harvard endowment investing) https://www.google.com/amp/s/www.bloomberg.com/amp/news/arti...
> The SEC appreciates the assistance of the Ontario Securities Commission.
Funny enough, none of it is legal in Canada apparently and Canadian citizens were not allowed to participate in the ICO.
https://coinmarketcap.com/currencies/kin/#charts
Kin ROI: -75%
Whether or not Kin is a scam is an entirely different matter from whether or not Kin is a security. The SEC has jurisdiction over securities, but not over scams generally. There is a substantial debate as to whether or not Kin is a security. At the very least, a decent argument has been made that it is not. Clearly Kik and their lawyers think they can win. Personally, I largely agree with the logic laid out by Kik in their Wells Response to the SEC[1]. HN user elliekelly gave other great examples of of the difficulty in applying securities laws in cases like this[2].
We have to be very careful ceding ground to the SEC on what constitutes a security. This is absolutely worth fighting if you care about innovation in the United States. Many of the donors to Kik's Defend Crypto campaign couldn't care less about Kin. That is not the point. However, they do care immensely about the ramifications this case could have for businesses.
Businesses should be experimenting with new ways to finance companies. Perhaps that is through the sale of tokenized products or virtual currencies. Maybe they will provide great alternatives to venture capital over the long term. The label of "security" is an onerous one that creates massive obstacles to that innovation, especially for small companies. If the SEC succeeds in labeling Kin a security, what could have been the beginning of an innovative step towards new business models for fledgling startups is now forever regulated away into obscurity in the US. Meanwhile, businesses in other countries get to keep experimenting. The lackluster guidance and unpredictable enforcement has already led to companies taking their business elsewhere. It's a shame really.
If there is even a sliver of a doubt as to whether or not Kin constitutes a security, we should not be so quick to cede ground to the SEC. If we let the SEC go unchallenged, they will expand their reach, becoming more entrenched and widening the scope of what constitutes a security. Gaining ground back becomes harder over time, especially if the SEC wins court cases.
If Kin truly is a scam, we have a multitude of ways to prosecute them without involving the notion of securities. If nothing else, we always have regular contract or tort law if there were any contractual misrepresentations or intent to defraud. We don't need the label of "security" or action from the SEC for these kinds of claims, and this approach would be perfectly adequate. There are a number of government agencies that could bring these sorts of cases and fight for the public. Trying to prove it is a security at the same time is simply regulatory overreach.
Bottom line, maybe Kin is a scam (I don't think so), maybe someone should do something about it, but let's be careful about expanding the scope of what constitutes a security. There are plenty of ways to prosecute Kik without ceding that ground.
Side point: if the SEC succeeds in labeling Kin a security this creates all sorts of logical incongruities with past no-action letters or lack of enforcement in other areas. For example, if Kin is a security, why were the San Francisco Giants given a no-action letter for pre-sales of stadium seats "all of which were initially sold to fans prior to the Park’s opening day" which could be resold through "a service that would facilitate the resale of Charter and Club seat licenses"?[3] Sure, the Giants made a buyer represent that they were "not acquiring the [seat] as an investment and has no expectation of profit", but do we really think that stopped people from buying with the intent to profit? ICOs put the same representations in some of their pre-sale agreements, and we all know that did not stop people. What amount of intent to consume vs resale is appropriate? Broadway theater shows do the same sort of pre-sales of seat licenses, and we all know how much people profit from the resale of successful shows. This checks all of the boxes of the Howie Test (paid money, expectation of profit, dependency on managerial efforts). How come the SEC does not bring action there? I don't see fair and even enforcement of the law, which really brings the efficacy of it all into question.
[1] Kin Wells Response, https://www.kin.org/wells_response.pdf
[2] HN comment by elliekelly, https://news.ycombinator.com/item?id=20098363
[3] https://www.sec.gov/divisions/corpfin/cf-noaction/sfba022406...
Good!
According to the article, "The Securities and Exchange Commission today sued Kik Interactive Inc", without clarifying in what jurisdiction they are suing them. It is about "the sale of one trillion digital tokens". It is therefore about the exchange of KIN tokens against other tokens such as BTC, ETH, USDT, or similar.
The KIN token is traded on 10+ different non-jurisdictional exchange platforms: https://coinmarketcap.com/currencies/kin/#markets
The American SEC cannot reasonably claim jurisdiction over the non-jurisdictional Ethereum platform, nor over any non-jurisdictional exchange platforms, because in that case, every country could do that too. If every country can do that, then no country can do that.
Why?
Well, in that case, KIK could trivially seek protection in North Korea or Russia, and prevent US enforcement by shielding under their nuclear umbrella.
Concerning KIK's marketing communications, it is not clear who exactly can regulate such messages: the country of message origination or the country of message destination.
We cannot allow US government departments to grab control over non-jurisdictional issues. That is absolutely not in the interest of international users. Therefore, it is necessary to encourage geopolitical adversaries of the USA to impede, thwart, and undermine any such attempt.