throbber
Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 1 of 53
`
`Plaintiff,
`
`
`
`vs.
`
`KIK INTERACTIVE INC.,
`
`Defendant.
`
`Civil Action No. 19-cv-5244 (AKH)
`
`
`
`
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X
`
`U.S. SECURITIES AND EXCHANGE
`:
`COMMISSION,
`
`:
`
`:
`
`:
`
`:
`
`- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X
`
`
`KIK INTERACTIVE, INC.’S MEMORANDUM OF LAW IN SUPPORT OF ITS
`MOTION FOR SUMMARY JUDGMENT
`
`
`
`
`
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 2 of 53
`
`TABLE OF CONTENTS
`
`
`Page
`
`
`PRELIMINARY STATEMENT ................................................................................................... 1
`RELEVANT FACTUAL BACKGROUND .................................................................................. 3
`A.
`Early Development of Kik Messenger and the Vision for Kin. ............................. 3
`B.
`Kik’s Announcement of Kin and Product Launch Strategy. ................................. 4
`1.
`Kik Conducted a Private Placement of Future Rights to Kin. .................. 5
`2.
`Kik Sold Kin to the Public to Jumpstart the Kin Economy. ..................... 7
`3.
`Kik Marketed and Sold Kin as a Medium of Exchange For Use in
`a Diverse and Decentralized Economy of Digital Services. .................... 8
`At the Time of Launch, Kin Tokens Were Functional and Could be Used
`as a Medium of Exchange. ................................................................................... 10
`Kin Tokens Continue to Serve as the Medium of Exchange for a
`Flourishing Digital Economy. .............................................................................. 12
`The SEC’s Complaint Conflates the Pre-sale and the TDE. ................................ 13
`E.
`ARGUMENT ............................................................................................................................... 13
`THE SALES OF KIN TOKENS DURING THE TDE DO NOT
`I.
`CONSTITUTE INVESTMENT CONTRACTS. ................................................. 14
`The Howey Test Requires An Objective Analysis of What Kik
`A.
`“Offered and Promised.” .......................................................................... 15
`There Is No Common Enterprise Between Kin Purchasers and/or
`Kik............................................................................................................ 17
`There Is No Common Enterprise Because Kik Did Not
`1.
`Owe TDE Purchasers Ongoing Contractual Obligations............. 18
`No Common Enterprise Exists Because Purchasers
`Assumed Full Control of Their Kin. ............................................ 21
`There Is No “Horizontal Commonality” Between TDE
`Purchasers. ................................................................................... 23
`There Is No Strict Vertical Commonality Between Kik and
`TDE Purchasers. .......................................................................... 25
`Kik Did Not Lead Purchasers Primarily To Expect Profits Based
`On The Essential Managerial and Entrepreneurial Efforts Of
`Others. ...................................................................................................... 27
`Kik Led Purchasers to Expect Use and Consumption of
`1.
`Kin................................................................................................ 29
`Any Expectation of Profits Could Not Have Been Based on
`the Essential Entrepreneurial or Managerial Efforts of Kik. ....... 31
`
`2.
`
`3.
`
`4.
`
`2.
`
`C.
`
`D.
`
`B.
`
`C.
`
`
`
`
`
`-i-
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`

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`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 3 of 53
`
`Table of Contents
`(continued)
`
`Page
`
`
`
`D.
`
`Characterizing Sales of Kin as Investment Contracts Would Be
`Confusing and Potentially Inconsistent With the Actions of Other
`Agencies. .................................................................................................. 35
`THE PRE-SALE WAS CONDUCTED PURSUANT TO A VALID
`EXEMPTION UNDER RULE 506(C) OF REGULATION D. .......................... 37
`Kik’s Pre-Sale Complied with Regulation D, and is Therefore
`A.
`Exempt from the Securities Act’s Registration Requirements. ............... 38
`The Pre-Sale and the TDE Were Separate and Distinct Offerings. ......... 41
`B.
`CONCLUSION ............................................................................................................................ 42
`
`II.
`
`
`
`
`
`-ii-
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`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 4 of 53
`
`TABLE OF AUTHORITIES
`
`
`Cases
`
`Page(s)
`
`Albanese v. Fla. Nat’l Bank of Orlando,
`823 F.2d 408 (11th Cir. 1987) ............................................................................................. 16, 32
`
`Aldrich v. McCulloch Props., Inc.,
`627 F.2d 1036 (10th Cir. 1980) ................................................................................................. 16
`
`Alunni v. Dev. Res. Grp., LLC,
`2009 WL 2579319 (M.D. Fla. Aug. 18, 2009) .................................................................... 21, 22
`
`Alunni v. Dev. Res. Grp., LLC,
`445 F. App’x 288 (11th Cir. 2011) .......................................................................... 17, 19, 28, 29
`
`Anderson v. Liberty Lobby, Inc.,
`477 U.S. 242 (1986) .................................................................................................................. 13
`
`Bamert v. Pulte Home Corp.,
`445 F. App’x 256 (11th Cir. 2011) ...................................................................................... 16, 32
`
`Bender v. Cont’l Towers Ltd. P’ship,
`32 F. Supp. 497 (S.D.N.Y. 1986) .............................................................................................. 31
`
`Berman v. Bache, Halsey, Stuart, Shields, Inc.,
`467 F. Supp. 311 (S.D. Ohio 1979) ........................................................................................... 36
`
`CFTC v. McDonnell,
`287 F. Supp. 3d 213 (E.D.N.Y. 2018) ................................................................................. 35, 37
`
`CFTC v. My Big Coin Pay, Inc.,
`334 F. Supp. 3d 492 (D. Mass. 2018) ........................................................................................ 37
`
`Copeland v. Hill,
`680 F. Supp. 466 (D. Mass. 1988) ....................................................................................... 22, 27
`
`Dallas Aerospace, Inc. v. CIS Air Corp.,
`2002 WL 31453789 (S.D.N.Y. Oct. 31, 2002) .......................................................................... 20
`
`Davis v. Rio Rancho Estates, Inc.,
`401 F. Supp. 1045 (S.D.N.Y. 1975) ........................................................................ 16, 18, 20, 33
`
`De Luz Ranchos Inv., Ltd. v. Coldwell Banker & Co.,
`608 F.2d 1297 (9th Cir. 1979) ....................................................................................... 16, 18, 20
`
`
`
`
`
`-iii-
`
`
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 5 of 53
`
`TABLE OF AUTHORITIES
`(continued)
`
`Page(s)
`
`Dependable Sales & Serv., Inc. v. TrueCar, Inc.,
`377 F. Supp. 3d 337 (S.D.N.Y. 2019) ....................................................................................... 13
`
`Goldberg v. 401 North Wabash Venture LLC,
`755 F.3d 456 (7th Cir. 2014) ............................................................................................... 23, 25
`
`Goodwin Props., LLC v. Acadia Grp., Inc.,
`2001 WL 800064 (D. Me. July 17, 2001) ................................................................................. 41
`
`Goodwin v. Elkins & Co.,
`F.2d 99 (3d Cir. 1984) ............................................................................................................... 15
`
`Gugick v. Melville Capital LLC,
`2014 WL 349526 (S.D.N.Y. Jan. 31, 2014) .............................................................................. 26
`
`Happy Inv. Grp. v. Lakeworld Props., Inc.,
`396 F. Supp. 175 (N.D. Cal. 1975) ............................................................................................ 19
`
`Hart v. Pulte Homes of Michigan Corp.,
`735 F.2d 1001 (6th Cir. 1984) ............................................................................................. 18, 28
`
`In re J.P. Jeanneret Assocs., Inc.,
`769 F. Supp. 2d 340 (S.D.N.Y. 2002) ....................................................................................... 25
`
`Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am. v. Daniel,
`439 U.S. 551 (1979) ............................................................................................................ 14, 36
`
`Inter-Mark USA, Inc. v. Intuit, Inc.,
`2008 WL 552482 (N.D. Cal. Feb. 27, 2008) ............................................................................. 20
`
`Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs. Ltd.,
`205 F. Supp. 2d 243 (S.D.N.Y. 2002) ....................................................................................... 25
`
`Keith v. Black Diamond Advisors, Inc.,
`48 F. Supp. 2d 326 (S.D.N.Y. 1999) ......................................................................................... 27
`
`Lavery v. Kearns,
`792 F. Supp. 847 (D. Me. 1992) .......................................................................................... 22, 23
`
`Lehman Bros. Commercial Corp. v. Minmetals Int’l Non-Ferrous Metals Trading Co.,
`179 F. Supp. 2d 159 (S.D.N.Y. 2001) ....................................................................................... 34
`
`Long v. Shultz Cattle Co.,
`881 F.2d 129 (5th Cir. 1989) ..................................................................................................... 32
`
`
`
`-iv-
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 6 of 53
`
`TABLE OF AUTHORITIES
`(continued)
`
`Page(s)
`
`Marine Bank v. Weaver,
`455 U.S. 551 (1982) .................................................................................................................. 15
`
`Marini v. Adamo,
`812 F. Supp. 2d 243 (E.D.N.Y. 2011) ..................................................................... 21, 22, 25, 27
`
`Mautner v. Alvin H. Glick Irrevocable Grantor Tr.,
`2019 WL 6311520 (S.D.N.Y. Nov. 25, 2019)........................................................................... 21
`
`Meyer v. Uber Techs., Inc.,
`868 F.3d 66 (2d Cir. 2017) ........................................................................................................ 21
`
`Noa v. Key Futures, Inc.
`638 F.2d 77 (9th Cir. 1980) ........................................................................................... 22, 33, 34
`
`Piambino v. Bailey,
`610 F.2d 1306 (5th Cir. 1980) ................................................................................................... 15
`
`Plazza v. Airbnb, Inc.,
`289 F. Supp. 3d 537 (S.D.N.Y. 2018) ....................................................................................... 21
`
`Revak v. SEC Realty Corp.,
`18 F.3d 81 (2d Cir. 1994) ................................................................................................... passim
`
`Rice v. Branigar Org., Inc.,
`922 F.2d 788 (11th Cir. 1991) ................................................................................................... 28
`
`Roberts v. Weight Watchers Int’l, Inc.,
`217 F. Supp. 3d 742 (S.D.N.Y. 2016) ....................................................................................... 20
`
`Robinson v. Glynn,
`349 F.3d 166 (4th Cir. 2003) ..................................................................................................... 35
`
`Rodriguez v. Banco Cent. Corp.,
`990 F.2d 7 (1st Cir. 1993) .................................................................................................. passim
`
`S&S NY Holdings, Inc. v. Able Energy, Inc.,
`2012 WL 3084112 (S.D.N.Y. July 27, 2012) ............................................................................ 16
`
`Savino v. E. F. Hutton & Co.,
`507 F. Supp. 1225 (S.D.N.Y. 1981) .......................................................................................... 24
`
`Scott v. Harris,
`550 U.S. 372 (2007) .................................................................................................................. 13
`
`
`
`-v-
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`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 7 of 53
`
`TABLE OF AUTHORITIES
`(continued)
`
`Sea Pines of Va., Inc. v. PLD, Ltd.,
`399 F. Supp. 708 (M.D. Fla. 1975)............................................................................................ 35
`
`Page(s)
`
`SEC v. Aqua-Sonic Prod. Corp.,
`524 F. Supp. 866 (S.D.N.Y. 1981) ............................................................................................ 15
`
`SEC v. Belmont Reid & Co.,
`794 F.2d 1388 (9th Cir. 1986) ................................................................................................... 33
`
`SEC v. C.M. Joiner Leasing Corp.,
`320 U.S. 344 (1943) .................................................................................................................. 15
`
`SEC v. Edwards,
`540 U.S. 389 (2004) .................................................................................................................. 35
`
`SEC v. Glenn W. Turner Enters., Inc.,
`474 F.2d 476 (9th Cir. 1973) ............................................................................................... 29, 32
`
`SEC v. Lauer,
`52 F.3d 667 (7th Cir. 1995) ....................................................................................................... 17
`
`SEC v. Levin,
`849 F.3d 995 (11th Cir. 2017) ................................................................................................... 38
`
`SEC v. Mattera,
`2013 WL 6485949 (S.D.N.Y. Dec. 9, 2013) ............................................................................. 39
`
`SEC v. Ralston Purina Co.,
`346 U.S. 119 (1953) .................................................................................................................. 41
`
`SEC v. SG Ltd.,
`265 F.3d 42 (1st Cir. 2001) ....................................................................................................... 24
`
`SEC v. Shavers,
`2013 WL 4028182 (E.D. Tex. Aug. 6, 2013) ............................................................................ 36
`
`SEC v. W.J. Howey Co., 328 U.S. 293 (1946) ....................................................................... passim
`
`Shailja Gandhi Revocable Tr. v. Sitara Capital Mgmt., LLC,
`2012 WL 3580680 (N.D. Ill. Aug. 14, 2012) ............................................................................ 38
`
`Teague v. Bakker,
`1998 WL 168876 (4th Cir. Apr. 8, 1998) .................................................................................. 15
`
`
`
`-vi-
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 8 of 53
`
`TABLE OF AUTHORITIES
`(continued)
`
`Page(s)
`
`United Hous. Found., Inc. v. Forman,
`421 U.S. 837 (1975) ............................................................................................................ 14, 28
`
`United States v. Leonard,
`529 F.3d 83 (2d Cir. 2008) ........................................................................................................ 29
`
`United States v. Ulbricht,
`31 F. Supp. 3d 540 (S.D.N.Y. 2014) ......................................................................................... 36
`
`Wals v. Fox Hills Dev. Corp.,
`24 F.3d 1016 (7th Cir. 1994) ............................................................................................... 14, 25
`
`Walsh v. Int’l Precious Metals Corp.,
`510 F. Supp. 867 (D. Utah 1981) ........................................................................................ 35, 36
`
`Walther v. Maricopa Intern. Inv. Corp.,
`1998 WL 186736 (S.D.N.Y. Apr. 17, 1998) ............................................................................. 25
`
`Warfield v. Alaniz,
`569 F.3d 1015 (9th Cir. 2009) ............................................................................................. 15, 28
`
`Woodward v. Terracor,
`574 F.2d 1023, 1023 (10th Cir. 1978) ................................................................................ passim
`
`Wright v. Nat’al Warranty Co.,
`953 F.2d 256 (6th Cir. 1992) ..................................................................................................... 37
`
`Statutes
`
`15 U.S.C. § 78c(a)(10) .................................................................................................................. 35
`
`Rules
`
`Fed. R. Civ. P. 56(a) ..................................................................................................................... 13
`
`Regulations
`
`17 C.F.R. § 230.501(a).................................................................................................................. 38
`
`17 C.F.R. § 230.502 .......................................................................................................... 38, 39, 41
`
`17 C.F.R. § 230.506 ...................................................................................................................... 38
`
`17 C.F.R. § 230.508 ...................................................................................................................... 38
`
`
`
`-vii-
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`

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`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 9 of 53
`
`TABLE OF AUTHORITIES
`(continued)
`
`Other Authorities
`
`Page(s)
`
`Black’s Law Dictionary ................................................................................................................ 35
`
`
`
`
`
`-viii-
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`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 10 of 53
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`
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`Defendant Kik Interactive, Inc. (“Kik”) respectfully submits this memorandum of law in
`
`support of its Motion for Summary Judgment.
`
`PRELIMINARY STATEMENT
`
`With this case, the Securities and Exchange Commission (the “SEC”) seeks to stretch the
`
`definition of a “security” under the federal securities laws far beyond the plain language of the
`
`Securities Act of 1933 (the “Securities Act”), as well as any prior judicial construction of that
`
`statute. In so doing, the SEC asks this Court to bless an unprecedented and dramatic expansion of
`
`the SEC’s regulatory authority. For the reasons discussed below, this Court should decline the
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`SEC’s invitation to ignore well established governing law.
`
`The SEC claims that Kik violated Section 5 of the Securities Act by offering or selling an
`
`unregistered “security” when it created and sold a digital currency called Kin in 2017. The public
`
`sale of Kin tokens (called the token distribution event or “TDE”) was preceded by a private sale
`
`of contractual rights to accredited investors (a process called the “Pre-sale”), through which Pre-
`
`sale participants got the right to purchase Kin tokens at a discount to the TDE price, if and when
`
`Kik successfully launched the Kin token. But the undisputed facts, together with decades of case
`
`law interpreting the definition of “security” under the Securities Act, show that Kik is entitled to
`
`judgment as a matter of law.
`
`Kik is entitled to summary judgment with respect to the TDE because the public sale of
`
`Kin did not give rise to any “investment contracts” as defined by the Supreme Court in SEC v.
`
`W.J. Howey Co., 328 U.S. 293, 299 (1946) ( “Howey”). The SEC fails to meet two of Howey’s
`
`three requirements: common enterprise and expectation of profits based of the essential managerial
`
`efforts of others. First, undisputed facts show that there was no “common enterprise” between or
`
`among Kik and those who purchased Kin in the TDE. It is undisputed that the terms of sale for
`
`the TDE only obligated Kik to deliver Kin tokens, and that TDE purchasers agreed to purchase
`
`
`
`
`
`

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`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 11 of 53
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`
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`Kin “as is,” with no express or implied warranties, and without any other ongoing contractual
`
`obligations for Kik. It is likewise undisputed that, once purchasers received their Kin, Kik had
`
`absolutely no control over the tokens, and no control over whether, when, or how purchasers used
`
`their Kin tokens. These undisputed facts preclude any finding of a “common enterprise.”
`
`Second, the SEC cannot show that Kin purchasers were led to expect profits from the
`
`essential managerial and entrepreneurial efforts of Kik or others, as Howey requires. The
`
`undisputed facts show that Kik promoted Kin as a medium of exchange to be used in a new digital
`
`economy, not as an investment opportunity. Kik also made clear that the economy’s success was
`
`dependent on developers and consumers other than Kik transacting in Kin. Similarly, Kik
`
`emphasized that it could not guarantee the price of Kin, nor could it guarantee its liquidity on
`
`secondary market exchanges. As such, to the extent that any purchasers subjectively expected to
`
`profit, those expectations could not have been based on anything Kik led them to believe, nor could
`
`they have expected to profit from any managerial or entrepreneurial efforts by Kik.
`
`Kik is also entitled to summary judgment with respect to the Pre-sale. The undisputed facts
`
`show that the Pre-sale is exempt from registration under Rule 506(c) of SEC Regulation D under
`
`the Securities Act. In the Pre-sale, Kik and each Pre-sale participant entered into a Simple
`
`Agreement for Future Tokens (“SAFT”), which gave the participant a contractual right to receive
`
`Kin tokens in the future, if and when Kik successfully launched the Kin token, at a discount to the
`
`public sale price. As such, Pre-sale participants relied upon Kik to build and launch the Kin tokens;
`
`otherwise, they would lose 20% of what they paid under the SAFT. Given those terms, Kik took
`
`a conservative approach and treated the rights encompassed in the SAFT agreements as securities,
`
`but in so doing, Kik availed itself of an exemption from the registration requirements of the
`
`Securities Act under Rule 506(c). In that regard, the undisputed facts show that Kik (1) sold Kin
`
`
`
`2
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`

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`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 12 of 53
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`
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`to accredited investors as defined in Regulation D, (2) conducted extensive diligence to ensure
`
`such participants were accredited and not purchasing as underwriters, (3) provided the requisite
`
`disclaimers set forth in Regulation D, and (4) filed a Form D with the SEC, memorializing the
`
`exemption. These undisputed facts mean that, as a matter of law, the Pre-sale was exempt from
`
`the registration requirements of the Securities Act.
`
`For these and other reasons discussed herein, Kik respectfully requests that the Court grant
`
`its motion for summary judgment.
`
`RELEVANT FACTUAL BACKGROUND
`
`A.
`
`Early Development of Kik Messenger and the Vision for Kin.
`
`Kik was founded in 2009 by Ted Livingston and Christopher Best. Defendant’s Local Rule
`
`56.1 Statement of Undisputed Material Facts (“SUMF”) ¶ 1. The following year, Kik launched a
`
`messenger application (“Kik Messenger”). Id. ¶ 2. Kik Messenger was immediately popular,
`
`garnering approximately 1 million users in 15 days and ultimately becoming one of the most
`
`widely-used messaging platforms in the world. Declaration of Tanner Philp (“Philp Decl.”) ¶ 5.
`
`As of 2017, Kik’s messenger application had 300 million registered users and 15 million monthly
`
`active users, and was ranked in the Top 10 Social Networking Apps in the Apple App store. Id. ¶
`
`6.1 But despite the success of the Kik Messenger app, Kik faced challenges in monetizing its
`
`business. Id. ¶ 8. Early on, Kik opted not to sell its users’ data. Id. This made it difficult for Kik
`
`to compete in an industry where the vast majority of advertising dollars go to a small number of
`
`very large players who monetize their users’ data by providing targeted advertising that can reach
`
`millions (or even billions) of users. Id.
`
`Eventually, Kik decided to propose a fundamentally different way for people to buy and
`
`
`1 In October 2019, Kik sold its messenger application to Medialab Inc. SUMF ¶ 122.
`
`
`
`3
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 13 of 53
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`
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`sell digital products and services. SUMF ¶¶ 3-19. Instead of providing digital products or services
`
`for “free,” and then monetizing them by selling users’ data (either directly or through targeted
`
`advertising), Kik would create and sell a digital currency, called “Kin,” that people could use to
`
`buy and sell digital products and services directly, without advertising. Id.; Philp Decl. ¶¶ 23-31.
`
`For example, a gaming application could charge users Kin tokens for acquiring new features or
`
`extra lives, and allow users to earn Kin by winning challenges against their friends. Or, in a
`
`messaging application, a user could host an interesting group chat and charge an entry fee of Kin
`
`tokens, and therefore be rewarded for their contribution. See, e.g., SUMF ¶¶ 90-91. The same
`
`Kin tokens could be earned in one application, and then spent in another, creating a thriving
`
`ecosystem which would allow developers to earn real revenue for offering desirable content. See,
`
`e.g., id. ¶¶ 79. One key component of this proposed new economy was that, although Kik would
`
`create and sell Kin in the first instance, once purchased, Kin would be available for any buyers or
`
`sellers (not just Kik) to use as a digital currency, and Kik could not make that happen by itself. Id.
`
`¶¶ 17-19.
`
`Having studied the potential applications of blockchain technology since 2011, Kik
`
`recognized that a cryptocurrency based on this technology would serve each of these goals. SUMF
`
`¶ 3. This is because blockchain technology was “decentralized,” meaning that it was not controlled
`
`by any one entity, but rather a network of participants. Philp Decl. ¶¶ 10-14. Kik believed that a
`
`cryptocurrency built on decentralized blockchain technology had the potential to galvanize a
`
`global community of like-minded developers to participate in a model where users and developers
`
`alike were rewarded for their contributions to the ecosystem using a cryptocurrency. Id. ¶¶ 29-30.
`
`B.
`
`Kik’s Announcement of Kin and Product Launch Strategy.
`
`Kik officially announced Kin to the public and released a whitepaper (the “Whitepaper”)
`
`setting forth its vision for the Kin economy on May 25, 2017. SUMF ¶¶ 4-7. Later, in August
`
`
`
`4
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 14 of 53
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`
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`2017, Kik announced its plan to conduct a “Token Distribution Event,” or “TDE,” in which it
`
`would distribute Kin to as many users as possible who signed up to buy Kin. Id. ¶ 38. The
`
`Whitepaper described the vision for the new Kin economy as:
`
`[A] global network of digital services that constitutes a new cooperative operating
`model, focused on the long term. In this model, developers and service providers
`will enjoy the right and opportunity to innovate and compete for compensation,
`while users will benefit from a diverse digital experience, freedom of choice, and
`access to a broad range of commercial services.
`
`Id. ¶ 14; Declaration of Michael Welsh, Ex. K.2
`
`On the same day, Kik’s CEO Ted Livingston also published an article on Medium.com
`
`setting forth Kik’s proposal for “a new ecosystem of digital services that will be truly open and
`
`decentralized, and which starts with a new cryptocurrency.” Id. ¶ 9; Ex. L, at 1. This article
`
`explained that Kik, like many developers, was struggling to “find [a] sustainable business model[]”
`
`without advertising revenue, and therefore proposed Kin as a digital currency for a new economy
`
`that would “compensate developers and creators without relying on advertising.” Ex. L, at 1.
`
`1.
`
`Kik Conducted a Private Placement of Future Rights to Kin.
`
`To fund its development of the technology and infrastructure underlying the Kin tokens,
`
`Kik conducted a private offering between June and September 11, 2017 (the “Pre-sale”). SUMF
`
`¶ 20. In the Pre-sale, Kik entered into separate contracts (“Simple Agreement for Future Tokens”
`
`or “SAFTs”) with a select group of sophisticated, high-net-worth participants who paid U.S.
`
`dollars in exchange for the right to receive a certain number of Kin tokens in the future at a
`
`discounted price, subject to a successful product launch of Kin (the “Network Launch”). Id. ¶¶
`
`20-25. In the accompanying Private Placement Memorandum (“PPM”), Kik stated that it would
`
`use the majority of the proceeds from the Pre-sale to develop a minimum viable product and
`
`
`2 All exhibits are attached to the Declaration of Michael E. Welsh which is being filed concurrently.
`
`
`
`5
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 15 of 53
`
`
`
`“progress the development of the Kin Ecosystem—a semi-centralized blockchain-based computer
`
`network that enables economic transactions and a reward system for digital service providers[.]”
`
`Ex. F, at KIK000051.
`
`Because the Pre-sale participants’ potential to profit was expressly contingent on Kik’s
`
`ability to successfully launch the token, the Pre-sale was conducted in accordance with Rule 506
`
`of Regulation D. SUMF ¶ 25; Philp Decl. ¶¶ 37-39.3 Kik retained an independent consultant,
`
`CoinList, to conduct due diligence and verify each investor’s accreditation status under Regulation
`
`D. SUMF ¶¶ 30-33; Philp Decl. ¶¶ 42-46. Kik placed express limitations on the ability of
`
`participants to transfer the SAFT or their interests in the Kin tokens. SUMF ¶ 35. Specifically,
`
`the SAFT and PPM provided that the rights conferred under the SAFT had not been registered
`
`under federal securities laws, and each participant expressly certified that it was entering the SAFT
`
`“for its own account and not with a view towards, or for resale in connection with, the sale or
`
`distribution thereof[.]” Id. ¶¶ 35-36. Kik filed a Form D with the SEC on September 11, 2017.
`
`SUMF ¶ 37.
`
`Kik raised approximately $50 million during the Pre-sale, which was more than enough to
`
`build the technology necessary to launch the token on the Ethereum blockchain, as well as the
`
`necessary infrastructure to use Kin within Kik. Id. ¶ 24. Kik used the funds to implement a product
`
`in Kik Messenger where users could link their cryptocurrency wallet to attain premium content
`
`and status within the app. Philp Decl. ¶ 49. To provide developers with one example of potential
`
`uses for Kin, Kik developed several tiers of user status that allowed users to unlock different types
`
`of sticker content corresponding to the tier. SUMF ¶¶ 76-77. The token also was functional as a
`
`
`3 While Kik treated the offer and sale of the rights conferred in the SAFT agreements as a securities offering,
`the underlying assets that were the subject of these agreements (i.e., the Kin tokens themselves) were never
`contemplated to be securities.
`
`
`
`6
`
`

`

`Case 1:19-cv-05244-AKH Document 62 Filed 03/20/20 Page 16 of 53
`
`
`
`medium of exchange outside of the Kik app if other developers wanted to incorporate it into their
`
`apps. Id. ¶¶ 68-75.
`
`2.
`
`Kik Sold Kin to the Public to Jumpstart the Kin Economy.
`
`After creating the necessary infrastructure to launch and use Kin tokens, Kik needed to
`
`distribute Kin to a wide base of prospective users who would form the new Kin economy. See
`
`SUMF ¶¶ 38-44, 57-66. To this end, Kik conducted a public sale of Kin starting on September 12,
`
`2017, in which purchasers paid Ether (another cryptocurrency) in exchange for Kin tokens (the
`
`“Token Distribution Event” or “TDE”). Id. ¶¶ 39, 55, 61. In line with the Bank Secrecy Act of
`
`1970 and the regulations promulgated thereunder, Kik required purchasers to pre-register for the
`
`sale on kin.kik.com, and thereby complete Kik’s “Know-Your-Customer” or “KYC” process, as
`
`well as Kik’s Anti-Money Laundering (“AML”) process. Id. ¶¶ 40-43. Kik retained an outside
`
`contractor to advise on and execute the KYC/AML processes. Id. ¶¶ 44; Philp Decl. ¶ 55. Users
`
`submitted personal information, including passport photos and addresses, which the contractors
`
`then used to crosscheck against various databases. SUMF ¶ 42. Despite some Pre-sale participants
`
`cautioning Kik that this robust process would deter people from participating, Kik proceeded with
`
`the mandatory KYC/AML.
`
`Unlike the Pre-sale, the TDE was governed by a contract entitled the Terms of Use, which
`
`was prominently featured on the website where al

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