SEC v. Kik – Kik files aggressive answer to SEC lawsuit

Quick Take

  • Kik has filed an aggressive answer to an SEC complaint filed in June
  • Kik contends SEC cherry-picked facts and took key evidence out of context
  • There are signals that contentious litigation may continue for some time

Link: Kik Answer 

The U.S. Securities and Exchange Commission (SEC) sued Canadian software company Kik Interactive Inc. in June. The complaint was an almost novelistic parade of horribles, painting Kik as a cash-strapped company on its last legs, turning to an unregistered securities offering in the form of the Kin token sale as a Hail Mary pass to save the company from certain failure.

Based on document discovery and interviews conducted by the SEC over an 18-month investigation, the Complaint put Kik in the worst possible light. This is, of course, the way these things go.  You generally don't expect the Plaintiff in a lawsuit -- particularly one like the SEC -- to say nice things about people they are suing. 

Anyway, Kik promised it would fight back and fight back hard, also raising a several million dollar legal defense fund that it promised it would use to "defend crypto."  While a number of early supporters backed out, Kik made it clear that it was not going to go gently into that good night. We now have Kik's answer and they've made good on their promise, and it's not too far out of line with what we predicted back in June.

Kik's answer weighs in at a meaty 117 pages and begins with a three-page introduction, which is fairly unusual for an answer in federal court litigation. You sometimes see plaintiffs do this but rarely defendants. And the answer pulls no punches, accusing the SEC of twisting facts to create a "highly selective and misleading depiction of the record[.]" 

For example, the SEC alleged that a Board member says that "Kik decided to 'pivot' to an entirely different business and attempt what a board member called a hail Mary pass." Not so fast, Kik says -- the actual quote says the opposite: "The more I think about it, I think this is a great idea. [p]eople call [a cryptocurrency] a hail Mary, but to me that is a longshot and I really do not think it is a longshot."

The Complaint starts with this aggressive defensive posture and the first three pages of this very unusual prologue points out two other examples where the SEC appears to have taken statements out of context for its own narrative purpose. Whether or not Kik sold unregistered securities, this doesn't look good and it does jump off the page in the introduction.

The rest of the complaint follows in this fashion. Kik portrays itself as a successful and ethical company, which resisted an acquisition overture because "the philosophy of the acquiring company was to collect and sell user data, contrary to Kik's core principles." And it takes swipes at the SEC early and often ("while it is difficult to explain the Commission's apparent contempt for the idea that a company would sell a product to generate revenue, Kin was not simply a means to fund operations.") Ooof. And a damaging statement by an employee about how selling a sticker was just to make the lawyers happy is cast (as expected) as an off-the-cuff comment by a low-level employee who was entirely incorrect and who did not know what he was talking about.

Bottom line -- this is a strong stuff and it signals a willingness to fight. But here's the thing, it doesn't really matter.  At the end of the day. What matters are the facts and circumstances surrounding the Kin token, its utility, and the application of the Howey Test. The argument that it's actually currency or that U.S. securities laws need to fundamentally change are not made stronger or weaker by this kind of novelistic pleading.

But ... strong stuff isn't always necessarily a winning strategy.  Only hindsight will tell us if it this was wise.   I'll allow that the SEC backed Kik into a corner and that they may have also overplayed a hand if they did take quotations out of context.  But they've counter-punched in a way that is bound to make this litigation long and drawn out. Who this favors remains to be seen, but the SEC has been around for a few years longer and is equipped to handle a long battle of attrition.  

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