Following the announcement of a lawsuit by SEC for offering an unregistered security in 2017, the Kin token has dropped some 30%.
It fell today to $0.000025, close to all time low and down significantly from the high of $0.001306. That’s a fall of 98%.
The token has fallen from a market cap of about $1 billion to now under $19 million.
Most other tokens have fallen too, but Kin appears to have fallen more sharply in part perhaps because some investors were unhappy with their move to Stellar away from ethereum.
Also in part of course because the United States Securities and Exchanges Commission (SEC) has now announced court proceedings against Kin.
In a publicized complaint, SEC says Kin did not tell investors it was losing money, stating:
“From mid-2015 to mid-2016, the company recorded $2.2 million in revenue but had total expenses of $29.2 million, and the company experienced a comprehensive loss, before adjustments for income taxes, of $29 million.
From mid- 2016 to mid-2017, the company recorded $1.5 million in revenue but had $32.3 million in expenses, and the company experienced a comprehensive loss, before adjustments for income taxes, of $32.9 million.”
Burning money in the early years of a tech startup is quite common as it figures out monetization, but SEC argues no one was willing to fund the company any longer with an ICO being their only choice.
“Daily average users dropped from more than 10 million in January 2016 to about 6 million in January 2017. Monthly average users dropped from more than 28 million in January 2016 to about 20 million in January 2017.”
All of the above would have of course been very relevant to investors and to their decision on whether to take chances, but Eileen Lyon, Kik’s General Counsel, says:
“The SEC’s complaint against Kik also presents a highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event. We look forward to presenting the full story in court.”
That will be a New York district court where the first clear judgment will be laid down on whether these sort of token sales are a security or not.
The judge may well leave it up to a jury because it is a matter of fact rather than law as to whether the Howey test is met or otherwise.
Whether it matters is a different question because if Kik is indeed losing so much money, then it isn’t clear whether they have any money. And if they don’t have any money, then all of this is an academic exercise.
They raised $100 million in 2017, about $50 million from accredited investors and another $50 million from the general public.
From the accredited investors it was in dollars, while from the public they raised 168,732 eth, currently worth about $41 million.
We couldn’t find their eth address. Santiment, which tracks these things, doesn’t have it either. So it isn’t clear when they sold or if they have sold at all because at the peak of prices that circa 170,000 eth would be worth some $200 million.
If they sold alongside many other ICOs around that time then they may have sufficient funds to pay back investors if the court so rules. Otherwise, at the loss of $30 million a year, they probably don’t have much left.
Eileen Lyon, Kik’s General Counsel said “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.”
On the other hand, had they engaged in proper disclosure of basic facts like revenue/profits and user numbers even without registration, then SEC might have left them alone as it would have been quite a bit more difficult to argue the matter.
While not revealing such pertinent information does raise questions as in ordinary circumstances no one would invest without having basic facts as you can’t quite value the investment.
Obviously even if they are burning money investors may have still thought it a good risk taking chance, but they might have thought otherwise.
Meaning its more of a case of the law needing reform, rather than being ditched completely. A start-up, for example, should still provide basic facts if they’re raising say $20 or $50 million and if they are established, but under a signed declaration rather than it being a full securities offering “that comes with a huge regulatory burden and expense,” as a consultant allegedly told Kik.
There clearly has to be a significant difference between what a global giant corporation has to comply with and what a basement start-up needs to comply with.
That too may be a consideration for a judge or a jury when they decide between security and currency as ultimately it would depend on interpretation which necessarily derives from what one thinks is “right.”
Congress as it stands is barely moving so if they go with currency then congress will have to reform the law by taking into consideration that the current Securities Act just doesn’t work because it is pretty much impossible to raise money from the public unless you’re already a somewhat massive corporation.
Meaning this case may well be less about facts and more about right and less about Kik and more about the law and the necessary reforms. So in some ways the conclusion of the judge and jury is clear, while in some other ways, they may well surprise and do their duty to hold power to account on behalf of the people who are being starved of funding by forcing congress to act.