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The Legal Fight Between the SEC and Kik is Heating Up

If you’ve seen The Wolf of Wall Street, you may imagine the SEC as the guys in suits who were tasked with investigating a Quaaludes-popping, shameless brokerage house. If you’ve seen Arrested Development, you might even think that the SEC has its own boats. (They don’t.) But right now, the SEC is actually engaged in a far more unexpected legal fight, with a Canadian chat platform that claims to be built especially for teens. 

It’s not the defendant you might anticipate, based on these media portrayals — the likes of Jordan Belfort are nowhere to be found. But Mr. Belfort does have an opinion here. He has previously stated that the dark market of cryptocurrency allows for pure speculation, massive fraud, and manipulation. Furthermore, he has said that the inefficiency and volatility of cryptocurrency defies logic at every level. And that is relevant here because the SEC-Kik case hinges on the proper classification for the teen chat platform’s digital tokens, referred to as “Kin.” 

What are they exactly? How should they be regulated? What are the obligations when it comes to transparency, marketing language, and disclosures? This legal battle could affect the future direction of tokenized interactivity and crypto-based commerce.

Boiler room or refuge?

Kik may have misframed the utility and nature of its digital token, Kin, in order to get a quick cash infusion, while avoiding the complications of paperwork and the level of disclosure that is traditionally required whenever registered securities are issued.

But Kik denies that it offered or sold any securities at all and, therefore, it couldn’t have violated the federal securities laws for the reasons stated by the SEC. It’s an issue that I analyzed here in DMN and in my comments to Finance Magnates. The day after the publication of my DMN article, Kik Interactive Inc. filed its legal response, thoroughly denying all allegations of the SEC’s complaint. 

In fact, the chat platform says that the SEC’s complaint “reflects a consistent effort to twist the facts by removing quotes from their context and misrepresenting the documents and testimony.” The company may not look much like a boiler room aggressively pushing penny stocks and may aspire to “become the central hub for everyday life for teens across the world,” but they certainly aren’t mincing words in this fight. Kik has explicitly claimed that the SEC engaged in “misdirection” in order to advance an agenda and compensate for a weak case. 

In its litigation, the SEC alleged that Kik executives lacked a realistic plan for increasing revenues. In its response, Kik described its messenger application as “successful” while also admitting that, aside from fiscal 2018, its costs had indeed exceeded its revenues. 

However, Kik says that its financial condition is irrelevant to the central argument around investment contracts. In other words, were people “investing” when they traded actual dollars for digital Kin? The SEC perspective would seem to suggest that purchasers of Kin must have been thinking that way. People couldn’t really do anything with Kin at the time, so why else would they give up real money if not as a form of speculation? Again, this echoes back to Belfort’s comments. 

Asserting core privacy principles at a cost

The company says that they could have fared better if they had been more unprincipled with user data.

Their response states: “And while some technology companies expressed significant interest in acquiring Kik, a deal did not materialize at that time, in large part, because Kik struggled to monetize its business in the traditional advertising model. Kik also chose to decline a potential deal because the philosophy of the acquiring company was to collect and sell user data, contrary to Kik’s core principles. This same challenge prompted Kik to explore the possibility of creating a new digital economy centered around a digital currency.” 

Kik claims that the SEC’s characterization of its financial condition is “misdirection,” but perhaps the same could be said about self-flattering explanations as to why certain deals fell through. Furthermore, the aggressive collection and monetization of data would not have only been restricted by the company’s own internal ethics. Data regulation is on the rise and federal law has sought to protect children’s online privacy for over two decades. 

Companies must obtain verifiable parental consent before collecting, using, and disclosing information from persons under the age of 13. Kik likely has many users under the age of 13. 

The FTC advises, “You must carefully examine the information you intend to collect in connection with every activity you offer in order to ensure that you are only collecting information that is reasonably necessary to participate in that activity. This guidance is in keeping with the Commission’s general guidance on data minimization.”

A larger struggle between tech giants and regulators 

Recently, both Facebook and Google have been fined for privacy violations. FTC Chairman Joe Simons said that “YouTube touted its popularity with children to prospective corporate clients” but then refused to acknowledge that portions of its platform were aimed at kids in order to justify non-compliance with children’s privacy law. 

Across the tech industry, companies are trying to innovate and grow, but they sometimes trample over privacy and neglect proper security.

Some consumers seem to readily accept these technological transformations but others are uneasy. Government agencies are trying to set firmer rules, but that’s hard to do. People don’t agree on definitions. They doubt the integrity behind each other’s strategies and tactics. They have vastly different perspectives and levels of knowledge.

Marketing tech, in particular, has raised a host of ethical dilemmas and most of them are far from settled.

Perhaps the SEC-Kik battle could settle one of them, in a legal sense.

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