Startup Management » Kik’s Response to the SEC Underscores The High Price of Regulatory Clarity

First, Let’s Peel Off the Fallacies from Reality

Yesterday, Kik released their response to the SEC complaint, denying the allegations put forth, citing repeated instances where the SEC distorted (or exaggerated) the facts, asserting that Kik did not violate federal securities laws, and falling just short of moving to dismiss the suit.

Since the SEC made their Complaint public (June 4th 2019), a lot has been written about the case. Not surprisingly, the SEC had stacked the deck in their favor by piling on a variety of allegations to make it appear that their case is strong. This over-the-top approach is apparently typical. However, Kik’s comprehensive and lengthy response peels off the fallacies from reality. 

From now on, anyone who wants to provide intelligent commentary about this case needs to read Kik’s response in its entirety before commenting. Unfortunately, up to now, much of the public commentary that came after the SEC released their complaint was off the mark because it was based on one side of the story.

With this release, reports such as this one (The 8 biggest bombshells from SEC’s Kik ICO Lawsuit) are totally debunked.

Painting Kik in a Corner Was Not Correct

Substantial parts of the SEC Complaint go in great lengths at attempting to portray Kik with their backs to the wall, alleging they raised the ICO funds as a desperation move. This couldn’t be further from the truth, and demonstrated the SEC knows nothing about the nature of startups. In addition to the specific responses that provide contrary evidence to what the SEC concocted, this Blockchain Association write-up did an excellent job summarizing why going that rabbit hole is irrelevant to the case, Cutting through the Noise: The nature of start-ups and the SEC-Kik complaint. 

Regulators Don’t Decide How to Define Innovation

In the news cycle following the publicizing of their Complaint, an SEC official said “Companies do not face a binary choice between innovation and compliance with the federal securities laws.” Well, regulators do not decide how to define innovations. Entrepreneurs do. Regulators are supposed to let innovation thrive and not become a hindrance to it. Regulators are supposed to regulate after innovation has had a chance to take shape, and not suffocate it while it is still in the crib. Regulators are supposed to be aware of the impact of upcoming innovations, apply good judgement on its applicability, and guide the market accordingly, not trap it. As I wrote in my previous blog post, the SEC has some wiggle room for suggesting updates and reforms to existing regulations, but they chose not to do that pertaining to cryptocurrency innovation for far too long.

The SEC’s continued lack of regulatory clarity around token offerings is the real issue here. And they are guilty of confusing the market.

Less than a week ago, at a speech in Singapore, SEC Commissioner Hester M. Peirce said this:

“As I have expressed elsewhere, I would like to see more focused momentum at the U.S. SEC toward finalizing our regulatory regime for digital assets.

Another notable feature of U.S. law is that the definition of what constitutes a security is a bit nebulous. Unlike many other countries, we do not have an exclusive list of what counts as a “security.”

[The full text of that speech is worth a read: Renegade Pandas: Opportunities for Cross Border Cooperation in Regulation of Digital Assets, July 30 2019]

Truth is, the blockchain market wants to innovate, but they are continuously bogged by the daunting question “what will the SEC think?”. The SEC has instilled fear, uncertainty and doubt in the eyes of the market and entrepreneurs in the US. This has forced real innovators to grow their businesses elsewhere, in Asia or Europe, and they are doing it unburdened from the heavy hands of the SEC (e.g Binance is now the #1 crypto-exchange in the world, at the expense of Coinbase).

Fighting the Good Industry Fight 

Let’s not lose sight of the bigger context: Kik is fighting the SEC not just to defend itself. This fight is also on behalf of the industry in the US and Canada. Kik is going to argue in Court that the aging Howey Test does not apply in its entirety to token-based offerings that have the characteristics of a community currency, as they explained in their Wells Response filed in November 2018.

In fact, Kik is not the only company that is not pleased with the SEC. Here’s a list of over 25 influential people, organizations and initiatives who are involved in trying to change the situation, A Who’s Who in The Fight for Better Blockchain Regulation in the US.

Of notable mention is Defend Crypto, the new initiative that Kik seeded (with $2M) that is dedicated to helping other projects outside of Kik in their fight to defend crypto, and is now stewarded by the Blockchain Association.

Why Does This Matter for the Industry?

Why this matters for the blockchains is the key question we should keep reminding ourselves. It matters, because depending on the outcome of this lawsuit, every blockchain related company in the US and Canada would be affected. In the worst case scenario, all companies wanting to innovate with token-based models will have no choice but to go down the path of a lengthy, costly and painful Reg A+ process, or go offshore to Singapore, Switzerland, the Cayman’s Islands or other more clement jurisdictions.

In the best case scenario, token-based models will see a revival and blockchain tech innovation will continue to flourish.

While this suit has been going on, and despite its costs and distraction, it is amazing to see Kik and Kin continue to thrive and grow, while they executed perfectly according to what they promised (a feat that is not shared by 95% of ICOs). The Kin cryptocurrency is now touching millions of users across over 60 apps, and is used in a variety of valuable earn/spend use cases. Just have a look at the stats and progress that are being tracked by the Kin Foundation (disclosure: I’m a board member of the Kin Foundation).

If you’d like to better understand why this matters, please read Kik’s full answer to the SEC Complaint, as well as their Wells Response

Let’s not allow the SEC to suffocate token-based innovation in the US and Canada. Unfortunately, regulatory clarity will come at a price.  

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