492 F.Supp.3d 169
S.D.N.Y.2020Background
- Kik launched Kin, a cryptocurrency intended to power a cross‑app "Kin ecosystem," and publicly sought to raise roughly $100 million to build that ecosystem.
- Kik ran a two‑phase distribution: a Pre‑Sale (June–Sept. 11, 2017) using SAFTs to accredited investors (raising ~$50M), and a public Token Distribution Event (TDE) beginning Sept. 12, 2017 (raising ~ $49M in Ether).
- Pre‑Sale purchasers paid dollars for SAFTs that promised future delivery of fungible Kin; TDE purchasers paid Ether and received identical Kin on distribution (one trillion tokens distributed; Kik retained 30% plus additional tokens held by the Kin Foundation).
- At distribution (Sept. 26, 2017) there were no functioning third‑party goods/services using Kin beyond a basic wallet and stickers; Kik pooled proceeds, converted Ether to dollars, and used funds to develop the promised ecosystem.
- SEC sued under Sections 5(a) and 5(c) of the Securities Act for offering/selling unregistered securities; parties cross‑moved for summary judgment. The court granted the SEC’s motion and denied Kik’s.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kin sold in the TDE were "securities" under Howey | Kin satisfied Howey: investment of money, pooled/common enterprise, expectation of profits from Kik’s efforts | Kin were consumptive/utility tokens, decentralized, purchasers motivated by use not profit; SEC guidance unclear | Kin are securities: Howey met—horizontal commonality (pooled funds/pooled success) and profits expected from Kik’s managerial efforts |
| Whether the Pre‑Sale was exempt under Rule 506(c) (Reg D) | Pre‑Sale integrated with the TDE (single financing plan, same class, same purpose, near‑concurrent timing) so Rule 506(c) exemption fails | Pre‑Sale was a separate, private accredited investor offering (SAFTs), Form D filed | Pre‑Sale and TDE integrated; Pre‑Sale not exempt under Rule 506(c) |
| Whether the term "investment contract" is unconstitutionally vague as applied | Howey and decades of caselaw give clear standards; no void‑for‑vagueness | Ambiguity from lack of SEC crypto‑specific rulemaking and inconsistent statements | Rejected: Howey test and caselaw give adequate notice and limit arbitrary enforcement |
| Whether Kik violated Section 5 by selling/offering unregistered securities | Kik sold/offered securities without registration or qualifying exemption | Kik denied liability and raised defenses (vagueness, separateness of offerings) | Court held Kik violated Section 5; summary judgment for SEC; remedies to be determined jointly |
Key Cases Cited
- SEC v. W.J. Howey Co., 328 U.S. 293 (U.S. 1946) (establishes Howey investment‑contract test)
- United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (U.S. 1975) (distinguishes consumptive purchases from securities)
- Tcherepnin v. Knight, 389 U.S. 332 (U.S. 1967) (substance over form; economic reality governs)
- CM Joiner Leasing Corp. v. United States, 320 U.S. 344 (U.S. 1943) (look outside instrument to plan of distribution and inducements)
- Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994) (horizontal and vertical commonality discussion)
- United States v. Leonard, 529 F.3d 83 (2d Cir. 2008) (Howey’s "solely" not literal; focus on primary nature of scheme)
- SEC v. Telegram Group Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (cryptocurrency offering analyzed under Howey)
- Balestra v. ATBCOIN LLC, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (denial of dismissal where tokens characterized as securities)
- SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998) (integration and Section 5 burden shifting)
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (summary judgment standard)