Burnt investors lobby to protect their right to dance in fire, but SEC says they have too much smoke in their eyes to see clearly.
In a recent filing, the SEC argued against the Blockchain Association’s right to file an amicus curiae in the SEC vs Kik case, alleging that the Association was not impartial.
For background, the SEC and Kik are arguing about whether Kik’s ICO violated securities laws. A non-profit organisation called the Blockchain Association (BA) chimed into the case as a kind of impartial outside expert by filing a document called an amicus curiae.
The BA came down strongly in favour of Kik in its opinion.
Now recently, the SEC disputed that amicus curiae, arguing that the Association should not be allowed to enter its outside opinion into the case because it’s composed largely of Kik associates and investors so it can’t be trusted to act as an impartial outside expert.
But here’s where things get weird, if not downright ironic. The SEC is theoretically representing burnt Kik investors in this case, but the investors themselves are submitting arguments in favour of Kik’s right to burn investors like them. Now the SEC is telling them to stay out of it because they’re too attached to the company that burnt them to be impartial.
That’s crypto for you.
The SEC highlights just how intrinsically the BA is tied to Kik.
The Blockchain Association has 24 members. Almost a third of them are invested in the project, and the Association itself is tied to the legal defence fund that Kik started up when it became apparent that legal troubles were upon it.
“One Blockchain Association member (USV) presently has an equity investment in Kik,” the SEC writes. “Four members (eToro, Protocol Labs, Polychain Capital and Wicklow Capital) made a direct or indirect investment in the Kin token, one of which (Polychain Capital) also allowed Kik to use its name to tout the offering.
“Another member (CoinList) conducted due diligence for Kik during the offering, and another member (Cumberland) handled the liquidation of some of the proceeds of the Kin offering.
“In addition an eighth member (Orchid) was founded by a partner in Pantera Capital, the largest single Kin purchaser. And Jed McCaleb, who purchased Kin tokens via SAFT, founded a ninth member (Stellar) and was the former chief technology officer of a tenth (Ripple).
“Also, it is possible that the brief was financed, in whole or in part, by DefendCrypto, a litigation fund created by Kik in 2019 to… ‘take on the SEC.’ The fund, which includes $2 million contributed by Kik, is presently overseen by the Blockchain Foundation, the Kin Foundation and four other entities, at least one of which (Arrington Capital) also invested in Kik’s 2017 offering of Kin tokens.”
According to the SEC, Kik’s financial situation prior to its ICO was absolute spherae.
By mid-2017, the company was allegedly losing millions a month with no plan for profitability. The year before that, Kik tried to sell itself but just couldn’t find a buyer.
The ICO was a desperate last-minute move, attempted solely because the company was out of options – or so the SEC alleges. That the ICO managed to rake in almost $100 million probably surprised no one more than Kik itself.
These brutal details were not disclosed to Kik ICO investors, the SEC says, and if people had known just how bad the situation was behind the scenes, they would have thought twice before jumping in.
SAFT purchasers were given figures for Kik’s declining userbase, but not the financial information. Plus it was private investors, rather than the unsuspecting American public, that made up the big chunk of Kin buyers. Of the roughly $100 million raised, about $55 million came from the USA and only about $16.8 million of that came from the American public.
The SEC is seeking full disgorgement of ill-gotten gains, with interest, from Kik.
The crux of the SEC’s arguments against Kik is that it was an ICO, which means it should have been registered as a security sale and that this kind of financial information should have been disclosed to investors. This is exactly the kind of information that would have kept BA members away from Kik.
The crux of the BA’s argument was that the Kin tokens shouldn’t just be lumped in with investments and that Kik shouldn’t need to disclose this kind of information. They weren’t making an investment so much as speculatively purchasing a discount software licence, the BA suggests, which shouldn’t require a full investment disclosure.
The full details of the Kik and BA entanglements are quite unflattering when laid bare, and it serves to highlight how centralised much of the investment power in the supposedly decentralised tech space is.
But it also highlights how potentially counterproductive it can be for the SEC to unilaterally decide it’s going to swoop in and rescue investors from themselves, tanking those investments in the process.
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