Blockchain Legal Digest

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SEC

Is the SEC Bullying Kik?

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Is the SEC lawsuit against Kik a step too far? Photo by PlusLexia.com | CC By 2.0

The Securities and Exchange Commission has filed what could be a landmark lawsuit accusing messaging app maker Kik with violating U.S. securities laws.

The lawsuit stems from Kik Interactive’s sale of blockchain-based tokens, which raised about $55 million for Kik, which had been struggling financially.  The SEC alleges that Kik failed to register the tokens, as required by U.S. law.

“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement in a press release.  “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”

The lawsuit, though, may help to establish clarity in what has been a murky area: are issuers of initial coin offerings required to comply with the same registration and disclosure requirements that traditional securities, such as stocks and bonds, must fulfill. Congress has not addressed the issue with legislation, and the SEC’s directives and litigation has not offered much clarity. Until the filing of the Kik lawsuit, the SEC had focused its litigation efforts on cases that involved not only unregistered tokens but also alleged fraud.

Some are questioning whether the lawsuit against Kik goes too far by seeking punishment for behavior that fell into a gray zone.

The SEC lawsuit is not a surprise, but still it’s a shame. Unlike many other companies that held ICOs, Kik was not a scam or a fly-by-night operation. As Fortune reported in 2017, the company had been experimenting with tokens for years with “Kik Points,” a type of digital money that traded hands up to 300,000 times a day. The SEC’s decision to come down heavy on Kik came in the name of protecting investors, but it also risks punishing early innovators in the blockchain economy.

Does the SEC’s Lawsuit Against Kik Go Too Far?

Predictably, Kik thinks the SEC’s legal arguments are flawed:

And some thorough analysis:

All I Do Is … Settle? Khaled and Mayweather Caught in Crypto Crackdown

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DJ Khaled agreed to pay a $50,000 fine to the SEC for failing to disclose a payment to promote an ICO.  Photo by Meghan Roberts | CC BY 2.0

The U.S. Securities and Exchange Commission announced that it entered into a settlement agreement with music producer DJ Khaled (known best for his hit “All I Do is Win”) and boxer Floyd Mayweather (known best for his hits) based on their failure to disclose payments to promote an Initial Coin Offering.

The SEC accused Khaled of accepting $50,000 to promote an ICO offered by Centra Tech Inc. and Mayweather accepting promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc.   Khaled and Mayweather promoted the ICOs via social media, but did not disclose the payments they had received.

“These cases highlight the importance of full disclosure to investors,” said SEC Enforcement Division Co-Director Stephanie Avakian. “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”

Mayweather and Khaled did not admit to the SEC’s findings, but agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest.   They also each agreed to not promote any securities for a period of time.

SEC Probes Investment Advisers’ Handling of Crypto

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U.S. Agencies continue crackdown on alleged illegal activities involving blockchain-based currencies and tokens.

The U.S. Securities and Exchange Commission is expanding its crackdown on on illegal activities involving cryptocurrencies by focusing on the activities of investment advisers, according to a report on the website Politico.

Politico reported that probe is targeting how advisers are storing cryptocurrencies, the vulnerability of crypto to hackers and possible price manipulation.

“Typically, after a sweep of this type, the SEC staff will publish its findings and observations, and that can provide very helpful guidance for advisers as they consider their compliance obligations,” Politico quoted Gail Bernstein, the top lawyer for a DC-based investment advisory trade group, as saying.

The problem is the latest in a series of actions by the SEC and the U.S. Commodities Futures Tradition Commission as they assert control over alleged illegal activity involving blockchain-based currencies and tokens.

Judge Orders Halt to Blockvest ICO

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Blockchain Exchange Commission logo
SEC alleges in court filing that defendants used logo of “Blockchain Exchange Commission” to mislead investors.

SEC alleges that company created a fictitious regulatory agency called the “Blockchain Exchange Commission” to aid in misleading investors.

A federal judge imposed a temporary restraining order on a planned Initial Coin Offering and pre-sales of Blockvest BLV tokens.

In an order issued October 5, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California issued an order that freezes the assets of Blockvest LLC and its founder Reginald Buddy Ringgold III and stops the sale of the business’s BLV digital tokens.

The complaint filed by the SEC alleges that defendants Blockvest and Ringgold:

  • Falsely claimed that the ICO had been “registered” and “approved” by the SEC, the Commodities Futures Trading Commission and the National Futures Associated and even used their logos in marketing materialsof the SEC on its website.
  • Claimed an association with the Deloitte accounting firm that did not exist.
  • Created a fictitious regulatory agency called the “Blockchain Exchange Commission” with its own logo and mission statement that are similar to the SEC’s and that lists its business address as the address of the SEC’s DC headquarters. 

“Here, Defendant’s use of the SEC and CFTC’s seals and logos of the NFA and Deloitte create a false appearance of legitimacy for the Blockvest ICO,” wrote Judge Curiel.  “Moreover, Defendant’s creation of the BEC, a false “regulator” , to promote the validity of the ICO as regulated is deceptive. Furthermore, the BEC’s adoption of the SEC’s seal, the SEC’s mission statement, the SEC’s headquarters address, and even a link to the SEC’s website created a false appearance that the ICOs are regulated when in fact, they are not.”

Judge Curiel scheduled a hearing in the case for October 18.  Copies of the orders are available here:

BlockvestTRODownload
BlockVestOrder2Download

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