The US Securities and Exchanges Commission (SEC) has taken a firm stand against the legal arguments provided by Kik Interactive, the Canadian crypto startup that raised $100 million from a 2017 initial coin online offering.
Kik’s latest filing shows how the social media platform is ready to go to any extent possible to refute the SEC’s claim that its ICO falls into the regulator’s trap. The company argues that the SEC was not entitled to take enforcement action as certain US laws should be “void for vagueness” on the lack of sufficient clarity. Specifically, Kik says the Securities Act runs afoul of due process as it fails to give adequate guidance about the “investment contract” term.
Let’s recall that the predominant question in the Kik case is whether cryptocurrency is a security, the public offering of which would require registration under the Securities Act.
The company has also hit back at the SEC’s determination over what it alleges are unfounded allegations regarding the launch of its tokens.
“Indeed, members of U.S. Congress, academia, and even an SEC Commissioner have publicly and repeatedly criticized the SEC’s failure to provide any guidance or demonstrate any consistency in its application of federal securities laws to cryptocurrency projects. There is ample evidence to show that the SEC has contributed to the confusion in this area by engaging in a pattern of arbitrary enforcement,” it said.
Kik added that the SEC’s sketchy guidance concerning cryptocurrencies “resulted in arbitrary enforcement and deprived Kik of its constitutional right to fair notice of what the law required.”
SEC refutes Kik’s allegations
In a 10-page filing Tuesday, the SEC laid out a paragraph-by-paragraph rebuttal of Kik’s arguments and flatly denied its core allegations after the US regulator branded its issue as a “security offering.”
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The agency explained to the court that the argument that “investment contract” under the Securities Act is void for vagueness was “untenable” in light of the many Supreme Court decisions defining and applying the term.
“Kik is free to conduct discovery to establish that that the Kin it offered and sold in 2017 was not an “investment contract,” but its “void for vagueness” argument has been rejected time and time again,” the SEC said.
The Ontario-based startup is also gearing up to challenge the SEC’s top officials themselves by issuing multiple subpoenas, setting the stage for a new legal battle that could have broad ramifications for the crypto market.
Kik argues that any action taken by the SEC would only harm token holders, and thus be against the regulator’s claim that it wants to protect ICO investors. As such, the company unveiled three subpoenas seeking information from William Hinman, the head of Corporate Finance, Valerie Szczepanik, a senior advisor for Digital Assets and Innovation, and Jonathan Ingram, Chief Legal Advisor for FinHub.
The SEC, however, seeks to quash Kik’s subpoenas and asked the court to ultimately toss its motions on several grounds, including that the testimony may constitute a sort of “admission” that Kik can use against the agency in litigation.
“Given this well-settled law, which the SEC provided to Kik before Kik issued the subpoenas in question, and Kik’s rejection of the SEC staff’s offer to cooperate with Kik to obtain through less obtrusive means the discovery it claims to need, the deposition notices appear designed solely to harass the identified Division of Corporation Finance officials. The SEC submits that they should, therefore, be quashed,” it explains
The US top regulator also claims that high-ranking government officials should not be deposed or called to testify regarding the reasons for taking legal action. It added that neither the SEC nor these officials have any first-hand information regarding Kik’s ICO that justifies its subpoenas based on the existence of “exceptional circumstances.”
Kik’s litigation hits the headlines throughout the last two years and then culminated in a court case, where a judge will determine which of the two parties is right or wrong. Indeed, some believe that Kik – as the first crypto issuer to publicly contest the SEC’s claims – is an important industry test case that could ultimately force a change in the way the agency regulates cryptocurrencies.