Why Kik should not stand down in its fight against the SEC

Arguably the most critical topic in crypto law today is the impending battle between the SEC and Kik. 

Most projects, like Paragon and Airfox who were targeted by the SEC late last year, try to quietly settle their cases in the shadows. But, when Kik was served with a Well’s notice from the SEC, the project fought back…publicly. 

Kik lawyered up and called on some of the top (and most expensive) legal minds in the world to defend itself.

For anyone in the crypto space, it’s hard not to root for Kik. It’s the classic David and Goliath story. The small guy standing up to bully. Freedom vs. Oppression. What’s not to love?

But the real question is… can Kik win?

I have written before that I am optimistic about Kik’s chances for success and I believe that it was the wrong decision for the SEC to pursue this case. 

But, not everyone shares my view. 

Recently I came across an opinion from Josh Lawler, a highly qualified securities lawyer based in California. I respect Lawler very much. I’ve read many of his articles and watched some of his videos. He is smart and knowledgeable. So it’s not without hesitation that I disagree with him on matters pertaining to US securities laws. 

Originally Lawler also favored Kik in this case, but after recent developments, he has changed his tune and is now calling for Kik to stand down. 

Today I’ll walk you through Lawler’s recent argument and why I disagree with him and think that Kik should stand strong in its fight against the SEC. 

The SEC’s conundrum with Kik 

To begin, if you haven’t read it yet, you might find Lawler’s first piece on the SEC vs. Kik case to be an interesting read. 

For the most part, Lawler’s analysis was in line with my in-depth article on the SEC vs. Kik controversy. Like me, Lawler seemed optimistic that Kik made a viable case in its response to the SEC’s Wells notice.

The 32-page response made a very compelling argument for why Kin (the digital currency issued by Kik) cannot, at least according to its lawyers, be classified as a security token. 

This put the SEC in a tough spot. There was no way the SEC could get an easy win nor exit the case without a loss. In Lawler’s words,

Now the SEC has a Hobson’s choice. Pursue KIK in an action where even if they win, they really lose; or slowly and quietly back away with no further action . . continuing their unfortunate silence as to regulatory guidelines for sales of digital assets.

To win the case against Kik, the SEC would restrict innovation and hurt the thousands of “Main Street Investors” that own and use Kin tokens. Precisely the people that it is their mission to protect. Letting the case go might have hurt the SEC’s pride, but it would have provided a better outcome overall.

So Kik’s powerful response could have been the SEC’s chance to step away, feeling like it had done its part. As Lawler elaborated,

Nothing actually compels the SEC to pursue KIK any further… If the SEC brings the case, they have no truly positive outcomes… the SEC can stick with its established modus operandi, provide no guidance at all. Say nothing at all; just back away, slowly. Unfortunate, but probable.

Should Kik now “stand down”?

But the SEC did not back down. Instead, it called for all-out war.

So now, in light of the SEC pushing forward. Lawler has changed his tune and followed up with a second article that argues that Kik should stand down because:

1. Kik’s token isn’t a real medium of exchange, and 
2. Kik’s CEO made certain statements that clearly indicate this was a securities offering.

While I respect Lawler, and his legal analysis may (or may not) turn out accurate, I disagree with his calls to Kik to “stand down”.  

Why?

First off, it is incredibly premature for Kik to concede its case after the initial SEC complaint. 

From a legal perspective, the complaint is where the prosecutor tries to lay out its best case. The supporting facts presented by the SEC may or may not be accurate or provable. Generally, they’re just trying to see how much dirt they can sling and if they can intimidate the defense. 

At a minimum, we’ll need to see Kik’s response to the complaint before suggesting that they back down. 

There may be a lot of facts that the SEC ignored in making its case. Or Kik could find a number of ways to mitigate the statements that the SEC put forward. So we have to wait and see how strong the case is before placing our bets.

I would also ask Lawler why the SEC has not brought criminal charges against Kik if this case is as strong as he believes it to be? 

As we’ve seen many times before, the SEC isn’t shy about bringing criminal charges against others that pursued an ICO or alleged unlawful securities offering. What makes Kik so special? 

To me, this is a sign that the SEC’s case is not as strong as Lawler thinks it might be. Of course, we have to wait and see how things play out. But as things stand today, there is no reason in my opinion for Kik to stand down.

What does this mean for Crypto Law Insiders?

At the end of the day, I’ll admit that even if the SEC doesn’t have a convincing case, it is possible that the agency will look to drain Kik of its resources. 

Because even if it can’t force an outright win, it could render the project no longer viable and force a settlement. This is the “innocent until proven broke” strategy that government agencies love to employ.

That said, if any project in the crypto space has the resources to fight the SEC, it’s Kik. Kik’s CEO, Ted Livingston, reports that the project has already spent over $5 million in legal fees and has designated another $2 million for further expenses.

On top of that, they have raised another $1.6 million through DefendCrypto.org, a site Kik set up to solicit support from the industry.

Ultimately, if you care about the future of crypto, I would consider supporting the cause. Because the fact is if Kik caves, the rest of the industry might as well bow to the SEC now.