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1/ A long thread of thoughts on the Kik answer to the SEC, from a crypto-litigator’s perspective, mostly for non-litigators. static1.squarespace.com/static/5ac136e…
2/ Most answers are not as argumentative as Kik’s. Most simply admit the bare minimum of what’s true, and flatly deny the rest with no further color (or deny knowledge sufficient to answer).
3/ This answer is unusual for two reasons. First, Kik is fighting in the court of public opinion as well as in actual court
4/ Second, in most lawsuits, discovery hasn’t happened yet. The plaintiff often doesn’t know the full story, or have internal emails or testimony. Defendants usually want to keep their strategy and the facts quieter at this stage.
5/ Here, because it’s SEC litigation, it’s different. The SEC already did a full investigation. It has all (or most) of the info. And the SEC doesn’t have much material of its own to produce. So most of discovery is done. Not much surprise left.
6/ So it’s a MUCH more detailed answer than typical. Which is good and bad for Kik. They take the opportunity to frame issues more favorably to themselves. But … Kik may regret some of their responses later.
7/ Not saying they will, necessarily, but they’re baking in their strategy now, and limiting their later flexibility. The lawyers for Kik are highly sophisticated, very smart, and thoughtful. So it’s clearly a deliberate strategy choice.
8/ OK, on to some of the points in the answer. (And, here, props to @katherineykwu for a great and entertaining markup.)
9/ On jurisdiction: I have thoughts. (Folks who know me well will know why; I will have no further comment on the “why”.)
10/ Kik asserts that less than a third of token purchasers were US residents. But that won’t be enough to help them on a personal jurisdictional argument. They’d lose. But they’re not really making that argument.
11/ If Kik were really going to argue there’s no personal jurisdiction, they wouldn’t file an answer. They’d move to dismiss for lack of personal jurisdiction. They knew they couldn’t win that argument, based on recent crypto case law.
12/ Oddly, Kik asserts lack of personal jurisdiction as an affirmative defense. But under Rule 12(b), personal jurisdiction has to be asserted in a pre-answer motion, or it’s waived.
13/ So, are Kik’s jurisdictional complaints just for PR? Maybe not. Kik could make a “Morrison v NAB” argument at the summary judgment stage: any transactions that were “extraterritorial” are beyond SEC enforcement reach.
14/ There’s a debate about whether Morrison applies to SEC enforcement. The SEC says it doesn’t, because of Dodd-Frank Section 939P. The 10th Circuit agreed with the SEC. (I personally think the 10th Circuit got it wrong. A debate for another time.)
15/ If Kik won on that argument, eliminating extraterritorial purchases from enforcement, and if two-thirds of purchases were outside the US (as Kik says), any potential disgorgement and civil penalties could be reduced commensurately.
16/ So, Kik is signaling that a Morrison argument might come later. I hope so, actually – it’s a pretty vital question for the crypto world, because of the nature of blockchain transactions.
17/ OK, on to the central legal question: was the Kik token a security that needed to be registered?
18/ The law wasn’t necessarily as clear back in 2017 when Kik did the offering. But the law in this area has developed a lot, and on the current law, Kik has an uphill battle on these facts.
19/ The cryptocurrency law on “what is a security” is virtually all at the district court level – we haven’t seen too much analysis in the federal appellate courts yet. Maybe Kik is playing for the appeals process.
20/ But, it’s a very fact-intense question. And appellate courts generally review fact determinations for clear error; lots of deference to district court factfinding. It’s hard to overturn at a Court of Appeals a finding of fact that a token was a security.
21/ (Maybe a better chance at the Supreme Court, where deference to district court factfinding is often looser. But we don’t have circuit splits yet, making it less likely the Supreme Court even takes up a case like this.)
22/ Also: because the question “is this token a security” is fact-intense, the SEC’s recent guidance in this area is a little helpful, but not a lot – it’s a series of questions, without weighting as to what is determinative. It’s pretty vague (more on that below).
23/ We know TokenJets isn’t a security. We know Pocketful of Quarters isn’t a security. But where’s the line? We don’t know. Kik is hoping to land on one side of the line. But it’s a tougher fight now than it may have been in 2017.
24/ Another thought: there’s a lot of quotes in the complaint about things Kik said, that might suggest Kin is a security. And a lot of “contextualization” of those statements in Kik’s answer.
25/ But a Section 5 violation doesn’t require scienter. It doesn’t matter if Kik personnel knew it was a security, or if they knew facts that would make it a security. The facts are the facts. What folks knew (and said) is a sideline; indirect evidence either way.
26/ Let's talk SAFTs. This case also makes clear an SEC view on SAFTs: even if you did a Reg D compliant SAFT, treating it like a security, that doesn’t mean it’s open season for a token sale after that. Your post-SAFT token sale ALSO might be a sale of securities.
27/ Kik is contesting that idea, using the SEC’s own words. But … it’s again fact-intensive. Using a SAFT might make you compliant, depending on how you issued the tokens later. Another “facts and circumstances” analysis. You can’t just yell “SAFT!” and get off scot free.
28/ [There’s an interesting subtext here – Cooley (@msantoriESQ) was one of the main pioneers of the SAFT, and here they are defending its use.]
29/ Now, for the main affirmative defense: Kik is going right at the Howey test, saying it’s unconstitutionally vague. That’s an argument pitched up at the Court of Appeals and the Supreme Court. Is it right?
30/ The SEC’s guidance this year was indeed kinda vague. But in 2017, even after The DAO report, it was more so. Old-school securities lawyers generally thought, right out of the box: “yeah, definitely securities.”
31/ But others weren’t so sure. Some qualities don’t neatly fit a securities box. The lines aren’t crystal clear even today, much less in Sept. 2017. Was it a consumptive good? A currency? A commodity? (All of those?) The lines are clearer today… but.
32/ Still, I think it’s uphill for Kik. A Section 5 registration violation does not require intent. There’s no real “rule of lenity” as there is in criminal law, where you shouldn’t be criminally penalized for a vague law.
33/ That said, who knows what happens if this goes to the Supreme Court. Should a case from 1946 – the year ENIAC was invested – govern cryptocurrency distribution? There are good arguments on all sides.
34/ I look forward to the motions for summary judgment, which will likely come out in a several months (after a discovery period). Absent a settlement, we're not likely to get much further info until then.
35/ Thanks for reading this far, my crypto-friends. Reach out through DMs or my law firm email easy to Google) if you want any actual legal advice (which none of the above is).
