Kik might have dared the SEC to do it, but that won’t make a potentially ruinous lawsuit sting any less.
The U.S. Securities and Exchange Commission sued the Canadian messaging startup yesterday, alleging that it had illegally run an $100 million unregistered securities offering in 2017.
The 49-page complaint alleged all kinds of devilry: Kik pivoting to blockchain as a cynical ploy to revive its ailing business, employees at the company describing the ICO model as a “Hail Mary pass,” and several incidents in which top executives literally promised investors that they would make “a ton of money.’”
Given this, you might have expected Kik’s flagship supporters, who are listed on the website for its $5 million legal defense fund, DefendCrypto, to have quietly withdrawn their support, and fled into the night.
Instead, they’re doubling down: the SEC’s allegations are devastating, but it’s worth the fight.
“Yesterday’s complaint was predictably brutal, but it’s supposed to be,” said Ryan Selkis, the CEO of data firm Messari.
The DefendCrypto fund was billed as a regulatory game changer. Kik is convinced that, in its legal defense, it will be able to change legal precedent and upend the Howey test, the triple-prong rule of thumb that regulators use to determine whether an asset pitched to buyers constitutes a security.
Among Kik’s most high-profile defenders, listed on the DefendCrypto website, were Coinbase, Circle, ShapeShift, Messari, Fight for the Future and Arrington XRP Capital. Circle, whose founder Jeremy Allaire has been an ardent supporter of the fund, was surreptitiously dropped from the website last night. (An archived copy of the DefendCrypto site from before the lawsuit lists Circle as a supporter. The current version does not.)
Circle did not respond to Decrypt’s request for comment, nor did representatives for Fight for the Future and Arrington XRP Capital.
Nevertheless, the others—save for Coinbase, whose own logo leapt to the less visible bottom of the DefendCrypto webpage—still declare their unwavering, if pessimistic, support.
“Yesterday’s complaint was predictably brutal, but it’s supposed to be—it’s the prosecution’s case,” Messari’s Selkis, who is assisting the startup in setting up a transparent “disclosures profile,” told Decrypt.
“Brutal” is a word that echoed throughout the cryptoverse in response to the SEC’s complaint. In it, the Commission accuses Kik of having deliberately encouraged a speculative rally prior to the launch of its Kin token in 2017, one of the key prongs of the Howey test, which determines an asset is a security if the issuing company promises returns to investors through no effort of their own.
Despite this, Selkis suggested that Kik might have leeway. Ethereum, too, was sold to investors on the basis that it would yield them profit, but the SEC has intimated that the project is now “sufficiently decentralized,” as SEC Division of Corporate Finance Director Bill Hinman declared, ambiguously, in a now notorious speech.
And what of the other Kik supporters?
ShapeShift, listed on the DefendCrypto website, hasn’t aided Kik financially, and its legal counsel, Veronica McGregor, said its support of Kik was “just ideological.”
Nevertheless, it is keen to see Kik succeed. “ShapeShift is supportive of the premise behind DefendCrypto, which is to obtain more clear guidance from the SEC,” said McGregor. “We support the concept of pushing the SEC to be more concrete in their guidance on tokens.”
She clarified, however, that ShapeShift’s legal team had “not reviewed the facts of the case at all, so have not yet formed any opinion as to whether or not we would go further in our support.”
It’s certainly in ShapeShift’s interest for Kik to trounce the SEC. The company’s reputation took a hit last year among diehard cypherpunks when pressure from federal regulators forced it to implement know-your-customer provisions in its flagship trading app.
Coinbase’s position is murkier. Yesterday, observers noted that an older screenshot on the DefendCrypto appeared to list Coinbase as one of the fund’s donors, while a second omitted the exchange.
Had Coinbase withdrawn support altogether?
Not at all, according to a source at Coinbase, who said that the exchange had never financed Kik’s fundraise. First, the update was first noted on May 28, a full week before the SEC’s lawsuit was unsealed. And second, the source explained, Coinbase just hosts the wallet into which the funds raised are deposited.
“Unfortunately it’s a little less salacious than it seems,” he said. “We have not been a financial contributor, just hosting their account.”
A Kik staffer corroborated this, adding that Coinbase’s logo can still, in fact, be viewed in full on the site—just lower down. “They weren’t removed from the site,” the source at Kik said. “We moved them to the bottom [of the website] and denoted that they are powering the wallet.”
Asked whether Kik had its full support, Coinbase declined to comment.
But, given the startup’s rough treatment yesterday, Kik might be happy with whatever support it can get from its big dog friends.