Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 1 of 19
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`USDCSDNY
`DOCUMENT
`ELECTRONICALLY FIL.EO
`DOC#: __ .....,,..----+--(cid:173)
`DATE FILED: q/50/Q.(;)2.o
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`I
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`OPINION AND ORDER ON
`MOTIONS FOR SUMMARY
`JUDGMENT
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`19 Civ. 5244 (AKH)
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`--------------------------------------------------------------- X
`U.S. SECURITIES AND EXCHANGE
`COMMISSION,
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`-against-
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`KIK INTERACTIVE INC.,
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`Plaintiff,
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`Defendant.
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`--------------------------------------------------------------- X
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`AL VINK. HELLERSTEIN, U.S.D.J.:
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`The U.S. Securities and Exchange Commission ("SEC" or "Plaintiff') filed this
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`action against Kik Interactive Inc. ("Kik" or "Defendant"), alleging that Kik's umegistered
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`offering of digital tokens violated Section 5 of the Securities Act. The parties cross-moved for
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`summary judgment. As detailed further herein, I hold that undisputed facts show Kik offered
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`and sold securities without a registration statement or exemption from registration, in violation of
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`Section 5. Therefore, the SEC's motion for summary judgment is granted, and Kik's motion for
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`summary judgment is denied.
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`I.
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`The Advent of Kik and Kin
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`A. Background
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`RELEVANT FACTS
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`Kik was founded in 2009 and launched its messaging application, Kik Messenger,
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`in 2010. Pl. 56.1 Resp.1 ,r,r 1-2. Kik Messenger allowed users to communicate in real-time
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`through their mobile devices, much like a text message or other chat application. Def. 56.1
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`1 "Pl. 56.1 Resp." refers to Plaintiff U.S. Securities and Exchange Commission's Response and Counter-Statement
`to Defendant Kile Interactive Inc.'s Local Civil Rule 56.1 Statement, ECF No. 75. Paragraph references incorporate
`both Kile's numbered statements and the SEC's responses.
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`1
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 2 of 19
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`Resp. 2 1 7. Though Kik Messenger was popular, it was not profitable, because Kik did not sell
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`user data to third-party advertisers. Kik Ex. 3 A, ECF No. 64-1115-8 ; Def. 56.1 Resp. 118-9. In
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`search of a profitable business model, Kik created and sold a digital currency, which it called
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`"Kin." Kik Ex. A, ECF No. 64-11123-27; Def. 56.1 Resp. 1118-32; see also SEC Ex.4 30, ECF
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`No. 60-30 (Board presentation laying out plan for Kin).
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`As planned by Kik, Kin was to be a cryptocurrency stored, transferred, and
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`recorded on a digital ledger called a blockchain. Kik Ex. A, ECF No. 64-11110-11. On a
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`blockchain, each transaction is recorded in a block, which is linked to a prior block through
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`cryptographic code. Kik Ex. A, ECF No. 64-1112. This results in the chain of blocks making
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`up the ledger, or blockchain. Id. Blockchains are decentralized because they rely on the
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`combined computing power of different networks of computers to process and verify
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`transactions. Kik Ex. A, ECF No. 64-1113. Users have access to their own digital wallets to
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`store Kin, and to buy and sell Kin. Kik Ex. A, ECF No. 64-1115. Kik planned to issue Kin
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`using an already existing blockchain, the Ethereum blockchain. Pl. 56.1 Resp. 168; Kik Ex. K,
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`ECF No. 64-11 , at 8. The Ethereum blockchain is an open source, decentralized platform that
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`has been used to issue other custom digital assets. Kik Ex. A, ECF No. 64-1 1 81; Kik Ex. K,
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`ECF No. 64-11 , at 8
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`Kik envisioned Kin as a means of buying and selling digital products and services
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`across different applications, including applications not run by Kik. For example, in this "digital
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`ecosystem," a user might create a song and charge other users Kin to listen to that song. Kik Ex.
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`K, ECF No. 64-11 , at 12-15 (Kik white paper listing "prospective use cases" for Kin). That user
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`2 "Def. 56.1 Resp." refers to Defendant's Response to Plaintiff U.S. Securities and Exchange Commission' s Local
`Rule 56. l Statement of Undisputed Material Facts in Support of Summary Judgment, ECF No. 78. Paragraph
`references incorporate both the SEC's numbered statements and Kik' s responses.
`3 "Kik Ex." refers to an exhibit annexed to the Declaration of Michael E. Welsh in Support of Defendant's Motion
`for Summary Judgment, ECF No. 64.
`4 "SEC Ex." refers to an exhibit annexed to the Declaration of Laura D' Allaird in Support of Plaintiff U.S. Securities
`and Exchange Commission's Motion for Summary Judgment, ECF No. 60.
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`2
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 3 of 19
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`might then take part of the Kin she earned and spend it on premium features in a gaming
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`application. A user would be able to earn Kin in one application and spend the Kin in another.
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`Internally, Kik set a goal of raising $100 million total through private and public
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`sales of Kin. Def. 56.1 Resp. ,r 37. Kik publicly announced its plans for Kin on May 25, 2017
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`through various media, including a white paper (Kik Ex. K, ECF No. 64-11), press release (Kik
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`Ex. M, ECF No. 64-13), blog post (Kik Ex. L, ECF No. 64-12), live announcement (SEC Ex. 36-
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`B, ECF No. 60-37), and promotional video (SEC Ex. 58-B, ECF No. 60-69).
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`Kik also embarked on a multi-city tour (the "Roadshow") to promote Kin and
`discussed Kin at other public events. Def. 56.1 Resp. ,r,r 57-71. In addition to describing how
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`Kin would operate, Kik's CEO explained how people could make money from early purchases
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`of Kin. For example, at an event five days before the beginning of the public sale of Kin, he
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`said, "if you set some aside for yourself at the beginning, you could make a lot of money." SEC
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`Ex. 49-B, ECF No. 60-58, at 36:7-10; see also SEC Ex. 48-B, ECF No. 60-55, at 10:20-11 :3.
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`This was possible because Kik "guaranteed scarcity" of Kin by offering a fixed supply. SEC Ex.
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`48-B, ECF No. 60-55, at 10:20-11:3. It hoped that as the supply stayed fixed, demand, and thus
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`price, would go up. Id.
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`B. The Private Sale of Kin
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`The launch of Kin took place in two phases: a private offering between June 2017
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`and September 11 , 2017 (labeled by Kik as the "Pre-Sale") and a public offering beginning on
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`September 12, 2017, the next day (labeled by Kik as the "Token Distribution Event" or "TDE").
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`In the Pre-Sale, Kik entered into agreements called Simple Agreements for Future Tokens
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`("SAFTs") with 50 sophisticated participants, verified by Kik's independent consultant to be
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`accredited investors. Pl. 56.1 Resp. ,r,r 21, 30-33; see also Kik Ex. E, ECF No. 64-5 (SAFT).
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`The SAFTs provided that Pre-Sale participants paid U.S. dollars for the right to receive Kin at a
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 4 of 19
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`30% discount: 50% of their acquisition when the public offering (described in the SAFT as the
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`"Network Launch") became effective, and 50% a year after. Pl. 56.1 Resp. ,I,I 22-23; see also
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`SAFT§ l(a). Pursuant to the SAFT, purchasers acknowledged that their right to acquire Kin
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`was a security and unregistered with the SEC, and that the right was being acquired for
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`investment and not for resale:
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`The Purchaser has been advised that the Right created by this instrument is a
`security and that the offers and sales of this Right have not been registered under
`any country's securities laws and, therefore, cannot be resold except in
`compliance with the applicable country's laws. The Purchaser is purchasing this
`instrument for its own account for investment, not as a nominee or agent, and not
`with a view to, or for resale in connection with, the distribution thereof, and the
`Purchaser has no present intention of selling, granting any participation in, or
`otherwise distributing the same.
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`SAFT § 4(b ). A Private Placement Memorandum also said, "[Y]ou must also represent in
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`writing that you are acquiring the SAFT for your own account and not for the account of others
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`and not with a view to resell or distribute such securities." Kik Ex. F, ECF No. 64-6 (Private
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`Placement Memorandum), at 20.
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`The Private Placement Memorandum further explained to Pre-Sale participants
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`that money they paid would be used to create a "Minimum Viable Product," advance the
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`development of a "Kin Ecosystem," and build an application to make the Kin Ecosystem
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`available via Kik Messenger. Private Placement Memorandum at 18. The Minimum Viable
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`Product, discussed in more detail below, was a "wallet" within the application that allowed
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`holders of Kin to view their balances, send and receive premium stickers, and view their Kin
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`status (i.e., one of five tiers based on number of Kin held). Private Placement Memorandum at 3.
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`Kik received $50 million through the Pre-Sale. Pl. 56.1 Resp. ,I 24. On
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`September 11, 2017, the last day of the Pre-Sale period, Kik filed a Form D with the SEC,
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 5 of 19
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`claiming the Pre-Sale was exempt under Rule 506(c). Pl. 56.1 Resp. 137; see also Kik Ex. G,
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`ECF No. 64-7 (Form D).
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`II.
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`The Public Sale (The Token Distribution Event)
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`Kik began its public sale of Kin, or as Kik called it, the Token Distribution Event,
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`or TDE, on September 12, 2017, the day after the private sale ended. TDE participants
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`purchased Kin using Ether, another type of cryptocurrency. Pl. 56.1 Resp. 139. A Terms of Use
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`Agreement, constituting the entire agreement between the purchaser and Kik, provided that "KIN
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`TOKENS ARE PROVIDED ON AN 'AS IS ' AND 'AS AVAILABLE' BASIS WITHOUT
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`WARRANTIES OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED." Kik
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`Ex. H, ECF No. 64-8, at KIK000088 , 096. It also explained that "Kin Tokens are intended to be
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`used for all transactions within a Kin ecosystem comprised of digital services that participate in
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`the right and opportunity to innovate and compete for compensation in the form of Kin Tokens."
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`Id. at KIK000081.
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`During the TDE, approximately 10,000 purchasers bought Kin in exchange for a
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`total of 168,732 Ether, worth approximately $49.2 million. Def. 56.1 Resp. 1260. For the first
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`24 hours, purchasers were permitted to buy only $4,393 worth of Kin. Pl. 56.1Resp. 1 58. After
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`that, they could buy unlimited amounts. Def. 56.1 Resp. 1 259. In the distribution that followed,
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`on September 26, 2017, one trillion Kin were distributed to purchasers in the private and public
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`sales, unrestricted, with the right to make further sales in the secondary markets. Def. 56.1 Resp.
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`11287-88, 291-92. Kik retained an additional three trillion Kin, or 30% of issued and
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`outstanding tokens. Def. 56.1 Resp. 11 106, 288. Six trillion additional tokens were distributed
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`to the Kin Foundation, a not-for-profit entity created by Kik. Def. 56.1 Resp. 1141 , 289. Thus,
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`Kik remained in control, directly and through the Kin Foundation, of 90% percent of all issued
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`and outstanding tokens. As of that date, September 26, 201 7, no goods or services were
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`available for sale to holders of Kin. Def. 56.1 Resp. 11 210-11. They had only Kik' s "Minimum
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 6 of 19
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`Viable Product," that is, a digital wallet showing the holder' s balance, and digital stickers of
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`undefined use or purpose. Pl. 56.1 Resp.,, 76-77.
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`As for Kik, it had received the payments in Ether and in dollars made by
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`purchasers at the private and public sales. Kik converted the Ether into dollars, and deposited the
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`dollars into two bank accounts. Def. 56.1 Resp.,, 294-95. Kik announced that it raised nearly
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`$100 million from the distribution of Kin. SEC Ex. 100, ECF No. 60-112. The money from the
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`sales funded Kik' s business operations, including the development of the Kin Ecosystem and
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`other projects to "execute on the plan that [Kik] produced in the white paper." Def. 56.1 Resp.
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`,, 296-99; SEC Ex. 10, ECF No. 60-10, at 480:10-18.
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`In the years that followed, 57 applications have offered opportunities to earn
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`and/or spend Kin within their.applications. Pl. 56.1 Resp., 81. Based on blockchain activity
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`excluding secondary market transactions, Kin currently ranks third among all cryptocurrencies.
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`Pl. 56.1 Resp. , 86.
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`III.
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`The Absence of SEC Regulations for Cryptocurrencies
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`Prior to Kik's distribution of Kin, the SEC had not promulgated any rules to
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`regulate issuances of cryptocurrencies. On July 25, 2017, after Kik had announced its plan to
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`issue Kin but before it made its distribution, the SEC issued its Report of Investigation Pursuant
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`to Section 21 (a) of the Securities Exchange Act of 1934: The DAO (the "DAO Report"). Release
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`No. 81207, 117 S.E.C. Docket 745, 2017 WL 7184670 (July 25, 2017); see also SEC Ex. 88,
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`ECF No. 60-100. In the DAO Report, the SEC described its investigation into a German
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`corporation' s sale of tokens to investors. The SEC determined that the tokens were securities,
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`but no enforcement proceedings were initiated. 2017 WL 7184670, at *1, 8-12. It "advise[d]
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`those who would use . . . distributed ledger or blockchain-enabled means for capital raising, to
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`take appropriate steps to ensure compliance with the U.S. federal securities laws." Id. at* 1.
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 7 of 19
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`IV.
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`Procedural History
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`The SEC filed the present suit on June 4, 2019. The SEC alleges violations of
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`Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. § 77e(a), (c), based on Kik's alleged
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`offering and sale of securities without a registration statement or exemption from registration.
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`See Complaint, ECF No. 1. The SEC seeks relief in the form of an injunction barring Kik from
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`violating Section 5(a) and 5( c) Securities Act, disgorgement of ill-gotten gains, and monetary
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`penalties under Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d). Kik denied the
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`allegations, asserting as an affirmative defense that the definition of "investment contract" is
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`void for vagueness as applied to Kik. I denied without prejudice the SEC's motion for judgment
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`on the pleadings based on that issue, holding that a substantive ruling must be deferred until
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`summary judgment. Order (Oct. 29, 2019), ECF No. 29. Now, fact discovery has been
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`completed, and the parties have cross-moved for summary judgment on all claims.
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`I.
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`Legal Standard
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`DISCUSSION
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`Summary judgment should be granted where "the movant shows that there is no
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`genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
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`law." Fed. R. Civ. P. 56(a). A genuine issue of material fact exists "if the evidence is such that a
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`reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby,
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`Inc. , 477 U.S. 242,248 (1986). "In considering the motion, the court' s responsibility is not to
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`resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while
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`resolving ambiguities and drawing reasonable inferences against the moving party." Knight v.
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`US. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986). Where, as here, both parties move for
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`summary judgment, "the court must evaluate each party's motion on its own merits, taking care
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`in each instance to draw all reasonable inferences against the party whose motion is under
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 8 of 19
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`consideration." Schwabenbauer v. Bd. of Ed. of City School Dist. of City of Olean, 667 F.2d 305,
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`314 (2d Cir. 1981).
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`II.
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`The Sale of Kin to the Public (the TDE) Was a Sale of a Security and Required a
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`Registration Statement
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`"Section 5 [of the Securities Act] provides that it is unlawful for any person to use
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`the channels of interstate commerce to sell a security unless a registration statement is in effect
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`as to such security." SEC v. Verdiramo, 890 F. Supp. 2d 257,268 (S.D.N.Y. 2011); see also 15
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`U.S.C. § 77e. "To prove a violation of Section 5 requires establishing three prima facie
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`elements: (1) That the defendant directly or indirectly sold or offered to sell securities; (2) that no
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`registration statement was in effect for the subject securities; and (3) that interstate means were
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`used in connection with the offer or sale." SEC v. Universal Express, Inc., 475 F. Supp. 2d 412,
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`422 (S.D.N.Y. 2007); see also SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006). With
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`respect to the sale of Kin to the public (the TDE), the only disputed legal issue is whether the
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`was the sale of a "security"; the parties agree that all other elements under Section 5 are met.
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`Under Section 2( a)(l) of the Securities Act, the definition of "security" includes
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`an "investment contract." 15 U.S.C. § 77b(a)(l). In determining what constitutes an investment
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`contract, courts rely on the test set forth in SEC v. WJ Howey Co.: "[A]n investment contract for
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`purposes of the Securities Act means a contract, transaction or scheme whereby a person invests
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`his money in a common enterprise and is led to expect profits solely from the efforts of the
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`promoter or a third party." 328 U.S. 293, 298-99 (1946); see also Revak v. SEC Realty Corp., 18
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`F .3d 81, 87 (2d Cir. 1994) ("three elements of the Howey test" are "(i) an investment of money
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`(ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others"). In
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`this analysis, "form should be disregarded for substance and the emphasis should be on
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`economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 9 of 19
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`Few courts in this Circuit have had the opportunity to apply Howey in the context
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`of cryptocurrency. The Second Circuit has not yet spoken on the issue, and two district court
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`decisions, while instructive, present important distinctions in their facts. See SEC v. Telegram
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`Group Inc. , No. 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (granting preliminary injunction to
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`prevent planned distribution of digital tokens because there was a substantial likelihood that SEC
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`would succeed in proving that plan constituted unregistered securities offering); Balestra v.
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`ATBCOIN LLC, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (denying motion to dismiss in putative
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`class action alleging that company sold unregistered securities through offering of digital
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`tokens). I have to decide this case without benefit of direct precedent in relation to
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`cryptocurrencies. I do so, understanding that the definition of investment contract is "a flexible
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`rather than a static principle, one that is capable of adaptation to meet the countless and variable
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`schemes devised by those who seek the use of the money of others on the promise of profits."
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`Howey, 328 U.S. at 299.
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`Kik concedes that its issuance of Kin through the TDE involved an investment of
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`money by which parti~ipants purchased or acquired Ether and exchanged Ether for Kin. Thus,
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`the parties agree that the first element of the Howey test is satisfied. The parties dispute whether
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`the second and third elements are satisfied. I hold that that they are.
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`A. Common Enterprise
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`"A common enterprise within the meaning of Howey can be established by a
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`showing of 'horizontal commonality' : the tying of each individual investor's fortunes to the
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`fortunes of the other investors by the pooling of assets, usually combined with the pro-rata
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`distribution of profits." Revak, 18 F .3d at 87. 5 Where horizontal commonality is present, "the
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`fortunes of each investor depend upon the profitability of the enterprise as a whole." Id.
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`5 "Some circuits hold that a common enterprise can also exist by virtue of ' vertical commonality ', which focuses on
`the relationship between the promoter and the body of investors." Revak, 18 F.3d at 87. The Second Circuit has
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`Kik established a common enterprise. Kik deposited the funds into a single bank
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`account. Def. 56.1 Resp. 1295. Kik used the funds for its operations, including the construction
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`of the digital ecosystem it promoted. See infra Part II.B; Def. 56.1 Resp. 11296-99. This
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`ecosystem was crucial. The success of the ecosystem drove demand for Kin and thus dictated
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`investors' profits. Kik recognized and repeatedly emphasized this. Rather than receiving a pro(cid:173)
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`rata distribution of profits, which is not required for a finding of horizontal commonality,
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`investors reaped their profits in the form of the increased value of Kin. See Balestra, 380 F.
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`Supp. 3d at 354 ("[F]ormalized profit-sharing mechanism" in the form of pro-rate distribution "is
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`not required for a finding of horizontal commonality.").
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`Kik, relying primarily on out-of-circuit authority, seeks to create additional
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`requirements for a common enterprise. It is true, as Kik asserts, that in the Terms of Use
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`Agreement, Kik expressly disclaimed any ongoing obligation to TDE purchasers after the
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`distribution of their Kin. However, an ongoing contractual obligation is not a necessary
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`requirement for a finding of a common enterprise. See Davis v. Rio Rancho Estates, Inc., 401 F.
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`Supp. 1045, 1049-50 (S.D.N.Y. 1975) (considering contractual obligations among other
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`representations, or lack thereof, in assessing common enterprise prong). For example, in Hart v.
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`Pulte Homes of Michigan Corp., one of the cases on which Kik relies, the Sixth Circuit
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`examined the economic realities of the transaction to determine if plaintiffs had alleged "a close
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`relationship between the sale of model homes and the financing of common development" to
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`establish a common enterprise. 735 F.2d 1001, 1005 (6th Cir. 1984). The contractual language
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`is important to, but not dispositive of, the common enterprise inquiry, and courts regularly
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`expressly rejected broad vertical commonality, which only requires the fortunes of the investors to be linked to the
`efforts of the promoter. Id. at 87-88. The Second Circuit has not yet decided whether strict vertical commonality,
`which requires that the fortunes of the investor be tied to the fortunes of the promoter, can satisfy the "common
`enterprise" element of the Howey test. Id. Because I find that horizontal commonality is present here, I need not
`address whether vertical commonality is sufficient for a finding of a common enterprise, nor whether vertical
`commonality is present here.
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`consider representations and behavior outside the contract. See SEC v. CM Joiner Leasing
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`Corp., 320 U.S. 344, 352-55 (1943) (courts consider the "character the instrument is given in
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`commerce by the terms of the offer, the plan of distribution, and the economic inducements held
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`out to the prospect," and may look "outside the instrument itself'). This is in line with the
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`Howey test's "emphasis ... on economic reality." Tcherepnin, 389 U.S. at 336.
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`Similarly, the fact that TDE purchasers could sell their Kin whenever they pleased
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`is not dispositive. With respect to horizontal commonality, the key feature is not that investors
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`must reap their profits at the same time; it is that investors' profits at any given time are tied to
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`the success of the enterprise. This is not a scenario where the funds of each investor were
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`segregated and separately managed, allowing for profits to remain independent. See Savino v. E.
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`F. Hutton & Co., Inc., 507 F. Supp. 1225, 2136-37 (S.D.N.Y. 1981) (rejecting theory of
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`horizontal commonality where " [t]he money invested in each . .. account was not merged into a
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`single investment fund," but instead, "[t]he profitability of each plaintiffs account was purely a
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`function of the transactions executed on behalf of that account, and was not causally related to
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`the profitability of the ... accounts as a whole").
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`The economic reality is that Kik, as it said it would, pooled proceeds from its
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`sales of Kin in an effort to create an infrastructure for Kin, and thus boost the value of the
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`investment. This is the nature of a common enterprise, to pool invested proceeds to increase the
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`range of goods and services from which income and profits could be earned or, in the case of
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`Kin, to increase the range of goods and services that holders of Kin would find beneficial to buy
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`and sell with Kin. See Balestra, 380 F. Supp. 3d at 354 (" [T]he value of [the digital asset] was
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`dictated by the success of the ... enterprise as a whole, thereby establishing horizontal
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`commonality."). The stronger the ecosystem that Kik built, the greater the demand for Kin, and
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`thus the greater the value of each purchaser' s investment.
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`B. Expectation of Profits Based on the Efforts of Others
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`To qualify as an investment contract, the investment must come with "a
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`reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of
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`others." United Haus. Found. , Inc. v. Forman, 421 U.S. 837, 852 (1975). Profits can take the
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`form of "capital appreciation resulting from the development of the initial investment." Id.
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`Howey contemplates that an investor is "led to expect profits solely from the efforts of the
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`promoter or a third party." 328 U.S at 298-99 (emphasis added). However, the Second Circuit
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`"ha[s] held that the word 'solely' should not be construed as a literal limitation; rather, we
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`'consider whether, under all the circumstances, the scheme was being promoted primarily as an
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`investment or as a means whereby participants could pool their own activities, their money and
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`the promoter's contribution in a meaningful way."' United States v. Leonard, 529 F.3d 83 , 88
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`(2d Cir. 2008) (quoting SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir.1982)). I
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`hold that TDE satisfies this element of the Howey test.
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`In public statements and at public events promoting Kin, Kik extolled Kin' s
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`profit-making potential. Kik' s CEO explained the role of supply and demand in driving the
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`value of Kin: Kik was offering only a limited supply of Kin, so as demand increased, the value of
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`Kin would increase, and early purchasers would have the opportunity to earn a profit. See SEC
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`Ex. 48-B, ECF No. 60-55, at 10:20-11:3. He explained, "If you could grow the demand for it,
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`then the price -- the value of that cryptocurrency would go up, such that if you set some aside for
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`yourself at the beginning, you could make a lot of money." SEC Ex. 49-B, ECF No. 60-58, at
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`36:7-10. In its white paper, Kik explained how Kin would be tradable on the secondary market
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`through cryptocurrency exchanges. Kik Ex. K, ECF No. 64-11, at 8. Furthermore, after the first
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`24 hours of the TDE, Kik removed the cap on the amount of Kin investors could purchase,
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`thereby allowing purchasers to buy more Kin to speculate on any increase in its value. Def. 56.1
`Resp. ,r,r 259, 261-62.
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 13 of 19
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`Kik characterized Kin also as a medium for consumptive use, "a general purpose
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`cryptocurrency for use in everyday digital services such as chat, social media, and payments."
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`Kik Ex. K, ECF No. 64-11, at 8; see also Kik Ex. H, ECF No. 64-8, at KIK000081. Kik argues
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`that this consumptive use shows that its sale of Kin does not constitute an investment contract.
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`See Forman, 421 U.S. at 852-53 ("[W]hen a purchaser is motivated by a desire to use or
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`consume the item purchased[,] ... the securities laws do not apply."). However, none of this
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`"consumptive use" was available at the time of the distribution. It would materialize only if the
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`enterprise advertised by Kik turned out to be successful. By contrast, in Forman, cited by Kik,
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`"there [ could] be no doubt that investors were attracted solely by the prospect of acquiring a
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`place to live, and not by financial returns on their investments." 320 U.S. at 344.
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`The demand for Kin, and thus the value of the investment, would not grow on its
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`own. Growth would rely heavily on Kik's entrepreneurial and managerial efforts. In its white
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`paper, Kik promised to "provide startup resources, technology, and a covenant to integrate with
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`the Kin cryptocurrency and brand." Kik Ex. K, ECF No. 64-11, at 21. In the white paper and
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`elsewhere, Kik further described efforts it would take to integrate Kin into Kik Messenger, create
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`incentives to attract developers who would establish new uses for Kin, and generally "foster an
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`ecosystem" rooted in Kin by "creat[ing] a series of new products, services, and systems." Id. at
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`5-6, 21. Kik's insistence in its briefs that "market forces" would drive the value of Kin ignores
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`the essential role of Kik in establishing the market. Moreover, as Kik's CEO explained, Kik had
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`a unique incentive to increase demand for Kin because it retained for itself 30% of the tokens
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`created. See SEC Ex. 46-B, ECF No. 60-49, at 35: 17-36:7 ("I think what we can guarantee is we
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`are all in on this .... [T]his is something that is in our financial best interest, because of the
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`30%, but actually, like, just to be honest, like, this is something we have to do.").
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`These efforts by Kik were crucial because without the promised digital
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`ecosystem, Kin would be worthless. This point draws attention to why Kik's reliance on case
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 14 of 19
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`law from the real estate context is misplaced. See, e.g. , Forman, 421 U.S. at 852-53 (holding
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`that homebuyers in a cooperative housing project were not parties to an investment contract
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`where buyers "were attracted solely by the prospect of acquiring a place to live, and not by
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`financial returns on their investments"); Davis, 401 F. Supp. at 1049-51 (holding there was not
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`an investment contract where plaintiff purchased land in a residential subdivision with the mere
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`hope of increase in value based on development of the neighborhood). Unlike real estate, Kin
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`have no inherent value and will generate no profit absent an ecosystem that drives demand. See
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`Bender v. Cont'l Towers Ltd. P 'ship, 632 F. Supp. 497,501 (S.D.N.Y. 1986) (contrasting sale of
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`condominiums with contexts where, "without the efforts of the promoters, the investments would
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`be virtually worthless"). It is undisputed that Kik had to be the primary driver of that ecosystem.
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`III.
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`The Pre-Sale Was Part of an Integrated Offering
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`"Section 5 provides that it is unlawful for any person to use the channels of
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`interstate commerce to sell a security ' [ u ]nless a registration statement is in effect as to [such]
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`security,' or to offer to sell or offer to buy a security 'unless a registration statement has been
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`filed as to such security."' SEC v. Cavanagh, 155 F.3d 129, 132-33 (2d Cir. 1998) (quoting 15
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`U.S.C. § 77e(a), (c)). "Once the SEC has made a prima facie case, the burden shifts to the
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`defendant to show that the securities were exempt from the registration requirement." Id. at 133.
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`With respect to the Pre-Sale, the private sale of Kin, Kik concedes that it sold securities, but
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`claims that the securities were exempt from registration under Rule 506( c) of Regulation D and
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`that the Court can grant it summary judgment on that basis. Under Rule 506(c) of Regulation D,
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`securities are exempt from the registration requirement where the issuer takes reasonable care to
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`ensure that investors are accredited investors and that they are not underwriters, and the issuer
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`files Form D with the SEC. 17 C.F.R. §§ 230.502, 230.506.
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`Case 1:19-cv-05244-AKH Document 88 Filed 09/30/20 Page 15 of 19
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`"All sales that are part of the same Regulation D offering must meet all of the
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`terms and conditions of Regulation D." 17 C.F.R. § 230.502(a). It is undisputed that the TDE
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`offering, the public sale that began one day after the private sale closed, did not comply with
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`Regulation D. Therefore, if the Pre-Sale and TDE sales are considered part of the same offering,
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`the Pre-Sale does not qualify for an exemption under Regulation D. In determining whether the
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`Pre-Sale and TDE should be considered integrated for purposes of Regulation D, the Court
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`considers:
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`( a) Whether the sales are part of a single plan of financing;
`(b) Whether the sales involve issuance of the same class of securities;
`( c) Whether the sales have been made at or about the same time;
`( d) Whether the same type of consideration is being received; and
`( e) Whether the sales are made for the same general purpose.
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`17 C.F.R. § 230.502(a) note. "Not all of these factors need be established to justify a finding that
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`transactions claimed to be separate were in fact one integrated transaction." SEC