I know a lot of other actions around the country are pushing the limits, hoping to get a favorable ruling and establish precedent (see: case vs. ACA being unconstitutional).

Is encoding a set of account values into a genesis block posted on GitHub a security offering?

They're so fucked. Good riddance.

The SEC usually acts but the penalties are usually for 1/100th of the profits.

If Kik loses here they're just going to make them pay $1M 'penalty' and move on.

>The SEC seeks a permanent injunction, disgorgement plus interest, and a penalty.

So they're seeking $55,000,000 USD of US investor funds, plus interest, plus a penalty.

That would bankrupt Kik and decimate the future of the project.

People with skin in the game clearly think it's a big deal. Kin's price tanked by 25% today, and that's after a long decline since the Well's notice. That trading volume is telling too. They turned over about 10% of the outstanding shares. By comparison, a typical day for GOOGL is 0.5%.

I'm not saying the company should be bankrupted, but it has to hurt them enough that they wouldn't want to risk trying again.

As for their being no legal way to rob a bank, there are a whole bunch of folks from the 2009 mortgage crises who would beg to differ.

9-120.000 - ATTORNEY FEE FORFEITURE GUIDELINES

Not many folks say "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court!"

A number of smaller ICOs just settled with the SEC and refunded the money to investors when they got a Wells Notice. Those are all the folks who said "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court." Kik is different in that they have deep pockets, strong legal counsel, and a product that's been out there for 8 years.

Except they don't. The only money they have is from an unregistered sale of securities which was only undertaken because they HAD NO MONEY. Their product costs more to run than it makes, and is irrelevant to the SEC lawsuit.

Lawyers know that they cannot be paid with that money. If they lose it will be forfeited. Similarly you can't rob a bank and use the money to pay your lawyer.

> It’s not like anything will happen to the executives.

That's absolutely not true. It's not unreasonable to expect that the SEC might refer people to the DOJ for criminal prosecution and jail time would send a nice signal.

Don't you think this would come out at trial? Sounds like the only reason they came out with an unregistered ICO was in order to generate revenue it needed to continue operating. That's a huge red flag for me if I'm an SEC investigator

>the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens. Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors. The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.

I would hope that nobody is putting money into crypto that they need to live on. But for money that you aren't going to need for years, there's a good chance that some form of cryptocurrency will end up replacing much of the current financial system, and it makes sense to diversify bets across them.

Losing half of your investment's value and the dotcom bubble are nothing compared to crypto losses for some unfortunate investors, unfortunately.

Plenty, if not most of the cryptocurrencies out there... are down >95% from their peaks in late 2017/early 2018.

Is the idea something along the lines of the double forces of greed and fear causing the perfect bubble? The one that doesn't pop because it eats its own downside on the way?

Why won't governments just shut down the on-ramp exchanges if the space ever looks like more than a way to gamble or make hidden-ish transactions?

My reasoning is this:

Fundamentally, the financial industry is about time, risk, and trust. The reason the industry exists is to shift productive capacity from individuals that are able to bear it now, to enterprises that may or may not pay off later, in a way that everybody who contributed to the success of an enterprise gets paid off later (when they need the funds) and gets to do it again. Currency is an information-carrying device that both lets you shift production from the consumer to the person best able to provide the service (medium of exchange) and records that a person provided valuable services at some point in the past so that they can claim services in the future (store of value). Stocks and bonds are both different ways of transferring money that people don't need now to people who can do useful things with it now, in a way that the investor can receive a payoff later. The banking system does the same, but with institutionalized, standardized practices. The insurance industry spreads risk from people who cannot bear it now across people who can; the futures & derivatives markets transfer that risk from firms who cannot bear it to firms who can.

When I look at the ICO boom of 2017, I saw the beginning of a functioning financial system. All the basic elements were in place - the ability to transfer value and claims of future value between participants, the ability for people with an excess of credit (assets) now to fund the development of projects that may pay off later, and the trust that if those projects were successful, they would benefit. It's all in a very rough form - the network got clogged such that it took ridiculous times for transaction confirmations, most of these projects continued to fail and end up worthless (I actually have hard data on this - roughly 90% of ICOs are either scams, failed, infeasible, or otherwise abandoned, while 10% are still going concerns 2 years later), there've been a bunch of hacks of exchanges and smart contracts, market manipulation is rampant, and cryptocurrency prices look like a roller coaster. Basically, we're making all the mistakes of 19th-century finance again: the crypto market looks a lot like the stock market did in the 1840s.

But we're doing it without needing any people involved in transactions. That's hugely powerful, in a world that software is eating. Finance is a $13T industry accounting for ~20% of world GDP and employing millions of incredibly high-paid people. In the sense of crypto being a cheap software-only competitor for extremely high-paid people, it's quite attractive.

And all of the problems that happened in 2017 are fixable. There are already lots of people working on the cryptocurrency scalability problem, between Bitcoin Lightning, Ethereum Casper, and new consensus algorithms like DPoS and SCP. People are working on the energy consumed by PoW, too - almost all new coins are proof-of-stake. Distributed exchanges like the 0x protocol remove the need to trust third-parties with your funds; you can keep them all in your own wallet. Continued bugfixes to Solidity shore up smart contract security. Stablecoins like MakerDAO and USDC remove the volatility of pricing in terms of crypto. Oracles provide a way to get more "facts" onto the blockchain so that smart contracts can rely on a disinterested third-party to make decisions on data. Each bubble distributes more crypto out of the hands of early-adopter whales (other than the Satoshi-coins, these account for less than 15% of total Bitcoin supply) and into the hands of ordinary people.

I think that governments if they acted now could shut down the fiat on-ramps to crypto, but I don't think they will. Too many people that use it for legitimate investment purposes, who will be very upset if they do. Government always tends to react a little too late to the social changes presented by new technology - we're only now seeing a backlash to the Internet, 30 years later, and at this point it's a little late to shut off the net even if certain governments are trying. Besides, if a technology makes the group of people who adopt it more efficient than the people who don't, the former will outcompete the latter. At some point, once people are directly selling goods for crypto and getting paid in it, it becomes too big to fail. I think that's a few years off (I expect crypto adoption to be slower than WWW adoption, because finance is more fundamental to society than communication is), but ultimately I think the ability to fund & partake in the benefits of new ventures without needing permission from Wall Street or Sand Hill Road will outweigh all the downsides of crypto.

The ICO is a way to raise money out of chumps without giving anything in exchange, but it's not more efficient, faster or better in any way than an IPO. It's just shadier.

With an ICO, you lock up some of that money supply in speculators' wallets, in exchange for the initial capital infusion. As the normal use-value price of the currency rises, they will sell and take their profits, injecting money back into the economy.

The wrinkles right now are that a.) nobody really knows how to value a currency with few-to-zero users and b.) a lot of these projects didn't deliver. That meant that a number of people lost their shirt in 2017 (actually, I suspect that number is less than commonly reported: I think most ICO investors were early Bitcoin and Ethereum hodlers who had already cashed out their initial investment into the bubble and then had some play money to diversify). But if you can pick winners now, when all the initial hype has disappeared, you stand to make a fair bit as people start using these platforms for real commerce.

This seems right to me. We can avoid things like accredited investor status and allow small amounts of capital to be invested without needing much legal overhead. And (for better or worse), ventures funded this way will also have a market price and never be private in the sense of today.

Of course, ICOs or whatever they morph into will need to be much more like securities than they were 2 years ago. Investing without actual equity makes little sense to me. To make these more reasonable, companies will need to know they aren't breaking securities laws when they issue. Once they know that, the ICOs can look less insane.

I buy the transaction cost argument in this sense. But I think there might be too many other issues for this to come about. Though I'm currently not confident enough in bill or bear status to bet either way.

Let's grant that scaling can be solved and volatility will not remain incredible like today. I think there are maybe deeper issues.

There's a lot of emphasis on 3rd party risk mitigation in the crypto world. But this new world reopens more 2nd party risk than it minimizes 3rd party risk to my first approximation.

Governments exist as dispute resolvers and preventers (military/police and laws/rules being the functions a government must have to be a government). They protect citizens from outside threats, but much more often from each other. In crypto, the permanence of a transaction is a primitive. But this makes scamming and various forms of theft even more attractive. People like the comfortable feeling of a government protecting them from financial fraud. If cryptocurrencies became the main currencies, I think they won't be able to look as loose and free as they do today. Even ignoring the funding of criminal activity, people want a way to reverse bad faith transactions. They'll demand oversight I think.

It's hard for me to imagine the hypothetical end state crypto financial world being anywhere near as libertarian-feeling as today's cryptocurrencies. Digital money is a government's dream. A government issued or one in which governments have a back door allows perfect monitoring of transactions and monetary policy controls.

The whole thing just seems too early to be predictable or investable to me. It's just for momentum trading today in my current view.

Though this is an idea space that forces me to change my mind back and forth. It's too complex to remain a settled, comfortable member of the landscape.

(To be fair, the SEC is pretty much the one government agency that Uber did not piss off - it's just the IRS, FBI, DoJ, and almost every local government in America that they're in trouble with.)

That doesn't really sound like a security to me...

We could have a privacy-oriented chat platform with a cryptocurrency "small cash" type of transaction system built on top. Combined with some informal craigslist style mini-stores, which flourished in China via Wechat.

I'm sure FB/WhatsApp could do it via normal payment channels, probably involving Visa/Mastercard. But the privacy story is awful for such a critical piece of software. Assuming they could pull it off. Maybe Kik could take up the privacy flag?

WSJ made a nice video of how Chinese people live "cashless" via WeChat in Shenzen: https://www.youtube.com/watch?v=75AXINUL47g

Granted, if Kik went bust tomorrow those tokens would most likely have no value, since their use is tied to Kik's messenger app. But in theory you would still own the tokens and could transfer them to anyone who would accept them.

I feel like most services that aim to replace another one ... just want that information for their own purposes, not the customer's benefit.

No most people don’t raise a $100M in violation of securities law...or even “testing” security laws, especially when Kik could have obtained the SECs opinion through a No Action Letter request.

Why didn’t Kik avail themselves to the law and process before raising $100M from the public?

Patrick Gibbs:

> First of all, you have to consider the SEC’s normal process for that sort of thing. It is very difficult and it takes a very, very, very long time for the SEC to give that kind of forward-looking advice, usually in the form of a no action letter. I mean, here we are in 2019 and they have only just recently released what I think is the very first no action letter relating to a cryptocurrency and that matter has been pending for well over a year.

> So it’s not practicable in a business that’s moving as quickly as this business was in 2016, 2017, to go and ask the SEC for a no action letter like that because the process just takes too long, and in a situation where in our view it’s quite clear that what we were doing is outside the scope of the SEC’s authority, we don’t generally think we have to go and ask the SEC’s permission to engage in business activity that is outside the scope of their authority.

https://unchainedpodcast.com/kin-sets-up-5-million-defendcry...

I empathize with what Mr. Gibbs is saying, and—if he speaks the truth—feeling, but it was Kik's choice to run a "quickly moving business" in a highly regulated arena.

People make the same arguments about security/privacy ("too much of a hassle in a quickly moving startup"), safety ("we can't afford to put two people in this test vehicle for autonomous driving") and so forth.

Kik might be right in this specific case, but in general "We're moving too quickly to deal with red tape" is not an argument.

First your citing the Cooley attorney who advised the company...of course he is going to justify his own legal advice.

It’s not going to look good when the court determines Kik knew if could have sought clarification from the SEC but didnt Because the SEC no Action Letter process wasn’t practical.

Let’s also keep in mind Cooley is the Firm that developed the SAFT (security agreement for future tokens) released their SAFT whitepaper into the wild telling startups to use their SAFT legal framework to raise money with ICOs legally and these are some of the first companies the SEC targeted for enforcement actions.

They threw out some free legal advice and people used it?

I guess you get what you pay for.

I remember the story of the startup executive who thought he maybe got odd advice from his CFO about stock options but was assured that "this is how it is done". He went and asked a local attorney effectively "I don't see how this could be legal."

So they didn't do it, little while later his CFO had to resign, because they were going to jail for doing the same stock option (basically massive back dating) plan at another company.

Bullet dodged!

For anyone curious, I think the parent poster is thinking of Ben Horowitz: https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/

>I guess you get what you pay for.

Then again, Kik, Cooley’s paying client also ended up in an SEC enforcement action (they claim they already spent $5M in legal fee prior to the SEC bringing the case).

I’m not so sure the issue is how much the clients paid for Cooley’s advice so much as the advice itself.

Supposedly Kik did seek clarification from the SEC and didn't get any. Then they received an enforcement action which is supposed to include details about the problems involved and the actions to be taken, but it contained none of those. Since then, they have been working for a year to get any kind of detail from the SEC, and the SEC has declined.

Personally, I think the root problem is that it seems the SEC is wildly under-funded and over-loaded. If a politician ran on a platform of election & campaign-finance reform + fund up the IRS & SEC; you couldn't call me a single-issue voter, but maybe a "2-issue voter" in that dream scenario.

The SEC also enforces gag orders on settlements to hide the proceedings and discovery from the public which only allows them to continue their abuses of the system.

A common thread among SEC settlements, also in CFTC and CTFB settlements is summed up from a recent SEC agreement

"mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis"

So basically you have no recourse against government agencies whose quasi legal status pretty much makes them immune to the checks and balances as specified in courts. If you want a closer to home comparison, FISA courts operate pretty much the same way. There is no disclosure other than what the government wants you to know and they have the full resources of the US government to take you down, the common tactic is to bankrupt individuals or threaten it to get the deals they want.

As for settlements with the terms "mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis", that's what pleading guilty looks like in a civil enforcement matter. You can't say "yes, we did it, and we'll pay the penalty rather than going to trial" to the SEC, and then turn around and say publicly "we didn't do it".