What registration and disclosure require

Graduate · enrolled learners

This lesson opens with Kik Interactive and the Kin token, 2019 to 2020.

What happened

In 2017 the messaging company Kik raised about 100 million dollars by selling a token called Kin, split between a public sale and a private presale to accredited investors that it claimed was exempt, without registering the offering with the Securities and Exchange Commission, and it argued that Kin would act as a currency with functional utility, bought for consumption rather than as an investment. The SEC sued in 2019, alleging that Kik had told investors they could expect profits from its effort to create a digital ecosystem, and on 30 September 2020 a federal court granted summary judgment for the SEC, ruling that the public and private sales were a single integrated offering of investment contracts that qualified for no exemption: investors had bought Kin expecting to profit from Kik's entrepreneurial and managerial efforts to build an ecosystem that would raise its value. Because the offering was of securities and was not registered, Kik had sold them without providing the disclosure that registration requires. Kik consented to a final judgment, paying a 5 million dollar penalty and agreeing to give the SEC advance notice of certain digital-asset issuances and transfers for three years. Kik argued the token was a currency for use, but the sale was an unregistered securities offering, and the harm the law targets is not the label; it is that investors were sold securities without the disclosure registration exists to force.

The decision point

Registration is not a bureaucratic stamp; it is the process that forces an issuer to disclose to investors the information securities law says they are owed, the financials, the risks, the use of proceeds, the conflicts, before they invest. So an unregistered securities offering is not merely a paperwork lapse; it is a sale of securities in which investors were deprived of that disclosure, which is the harm the requirement exists to prevent. Kik is the case: it sold about 100 million dollars of what a court held were securities without registering, so its investors bought without the disclosure registration would have compelled, and Kik's argument that Kin was a currency bought for consumption did not change that they had been sold unregistered securities. For a tokenized asset that is a security, this means registration, or a genuine exemption from it, is mandatory, and its function is to deliver disclosure to the people buying. The decision an issuer makes is therefore to treat registration as the mechanism that gives investors what the law requires them to have, not a formality to avoid, because skipping it does not skip a form, it skips the disclosure, and selling a security without that disclosure is the violation, as Kik's 5 million dollar settlement recorded.

Recorded loss

$5,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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