On October 21, 2020, the United States District Court for the Southern District of New York (SDNY) entered a final judgment on consent against Kik Interactive Inc. (Kik) after the Court previously determined that Kik failed to comply with the registration requirements of the Securities Act of 1933 (Securities Act) as previously alleged by the Securities and Exchange Commission (SEC). In the settlement, Kik agreed to (i) pay a $5 million penalty to the SEC, and (ii) provide the SEC with 45 days’ notice before Kik participates in any issuance, offer, sale, or transfer of any of digital asset within the next three years of this final judgment.
Kik—the developer of a popular free-to-use messenger application—developed its own “digital ecosystem” and a corresponding cryptocurrency named “Kin.” Kik offered and sold Kin in an initial coin offering (ICO), which was structured in a private and public sale period. During the private sale period, Kik entered into Simple Agreements for Future Tokens (SAFTs) with 50 sophisticated investors and raised approximately $50 million in cash. The day after the private sale period ended, the public sale commenced and raised another $49.2 million worth of Ethereum from approximately 10,000 investors. By the end of the public sale period, Kik had only launched a product with basic wallet features for Kin. While the platform and ecosystem was yet to be developed, secondary market trading for Kin began immediately.
The SEC alleged that Kin are securities and that Kik offered and sold such securities to investors without a registration statement or any exemption from registration as required under section 5 of the Securities Act.
The SDNY relied in its opinion on the Howey test. Howey provides the framework for determining whether an instrument is an “investment contract,” which needs to be registered as a securities offering unless an exemption applies. The test consists of the following four prongs: (i) investment of money, (ii) common enterprise, (iii) expectation of profit, and (iv) efforts of others.
While the investment of money was undisputed by the parties, the analysis of a common enterprise and expectation of profits were at the core of the SDNY’s decision. Common enterprise can be satisfied with horizontal commonality, which refers to investors pooling assets and sharing profits on a pro rata basis. Kik sought to reject the idea of a common enterprise between itself and its investors on the basis of disclaimers in its agreements governing that relationship. The Court, however, merely looked at the economic reality where Kik, directly and indirectly (along with its investors), had an interest in the success of Kin.
In public statements during the public sale period, Kik stressed how investors could make profits with increasing demand in Kin. The Court found that Kik’s statements led investors to expect profits from their initial investment derived from increases in the price of Kin in the secondary market. While Kik claimed that Kin were not a means of profit-making, but rather a medium of consumptive use, the Court found this defense to be without merits as Kin’s purported native ecosystem did not exist at the conclusion of the public sale period.
After determining that Kin are securities under the Howey test, the Court then analyzed Kik’s claim that the private sale period was exempt from filing a registration statement under Regulation D (“Reg. D”). A Reg. D exemption applies where the issuer of securities takes reasonable care to ensure that investors are accredited investors and files Form D with the SEC. To determine whether different sales are part of an integrated offering for the purposes of , Reg. D, the following factors are considered: (i) whether the sales are part of a single plan of financing, (ii) whether the sales involve issuances of the same class of securities, (iii) whether the sales have been made at or about the same time, (iv) whether the same type of consideration is being received, and (v) whether the sales are made for the same general purpose. The first and fifth factor are generally given greater weight.
Kik filed Form D with the SEC with respect to the private sale and claimed that the private and public sales were not integrated since each sale used a different type of consideration. However, the Court determined that the two most relevant factors, the sales’ single plan of financing and the same general purpose, were met. The Court also rejected Kik’s claim that both sales accepted different types of consideration since the Ethereum accepted during the public sale period as consideration could be “easily converted” into U.S. dollars, which was used as consideration during the private sale period.
The Court’s decision is strikingly similar to SDNY’s Telegram decision from March 2020 by Judge Castel. However, the Telegram decision fell short in finding that Telegram’s Gram token actually constituted securities and instead held that such finding would bear a “substantial likelihood of success.” The present case goes further and actually answers this question with respect to Kin.
 15 U.S.C. § 77e.
 SEC v. Kik Interactive Inc., 2020 U.S. Dist. LEXIS 181087 (S.D.N.Y. Sep. 30, 2020).
 Id. 2-9.
 See SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).
 Kik Interactive, 2020 U.S. Dist. LEXIS at 12-17.
 United Hous. Found., Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051 (1975).
 Id. at 17-21
 Id. at 14.
 Rule 506(c) of Regulation D (17 C.F.R. § 230.506).
 SEC v. Mattera, No. 11 Civ. 8323(PKC), 2013 U.S. Dist. LEXIS 174163, 2013 WL 6485949, at *13 (S.D.N.Y. Dec. 9, 2013).
 Kik Interactive, 2020 U.S. Dist. LEXIS at 22-25.
 SEC v. Telegram Grp. Inc., No. 19-cv-9439 (PKC) (S.D.N.Y. Mar. 24, 2020).