The United States Securities and Exchange Commission (SEC) has sued Kik Interactive Inc, alleging the Canada-based chat platform conducted an illegal $100 million securities offering of digital tokens.
The SEC says that Kik sold digital tokens to US investors without registering the initial coin offering (ICO) -- a requirement under US securities laws.
An ICO is a form of crowdfunding that can be a source of capital for startups without the need for angel investors, banks, or traditional funding rounds. In return for investor cash, the organisations involved offer virtual coins and the transaction is recorded, typically, on a blockchain.
The Kin token was sold in 2017 and was marketed as an investment opportunity, the SEC alleges.
The SEC further alleges the ICO followed Kik losing money "for years" on its sole product, an online messaging application. The SEC's complaint alleges Kik's management predicted internally that it would run out of money in 2017.
A statement from the SEC says that Kik pivoted to a new type of business, which it financed through the sale of one trillion Kin tokens.
Kik raised more than $55 million from US investors, according to the SEC, and its complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.
"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," Co-Director of the SEC's Division of Enforcement Steven Peikin said.
"Companies do not face a binary choice between innovation and compliance with the federal securities laws."
In responding to the SEC action, Kik CEO Ted Livingston said he expects Kin's "momentum" to grow and that his company is going to fight the claims.
"We have been expecting this for quite some time, and we welcome the opportunity to fight for the future of crypto in the United States. We hope this case will make it clear that the securities laws should not be applied to a currency used by millions of people in dozens of apps," Livingstone said.
"Kin is being used by more people in more apps every day, and come trial, Kin may be the most widely used cryptocurrency in the world."
Livingstone continued by saying that while the SEC's actions are a challenge to overcome, the actions "won't affect the use, transferability, and characterization of Kin, and we expect momentum in the Kin Ecosystem to only continue to grow".
Meanwhile, Kik's General Counsel Eileen Lyon has said the SEC's complaint against Kik is based on a flawed legal theory.
"Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a 'common enterprise'; and that any contributions by a seller or promoter are necessarily the 'essential' managerial or entrepreneurial efforts required to create an investment contract," she said.
"These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny."
On its website, Kik says Kin is similar to other digital currencies that enable individuals to "earn and spend", pointing to Candy Crush Gold that allows game-players to buy virtual gold with real money, then use for game boosters, and Line Coins that users can earn coins for downloading apps, then use coins for stickers.