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Kik Interactive, the Canada-based owner and operator of mobile messaging app called Kik Messenger, was defeated in its legal fight against the U.S. Securities and Exchange Commission (SEC) over its $100 million initial coin offering (ICO) in 2017. In June last year, the SEC filed a lawsuit against Kik for allegedly violating federal securities laws. The Commission alleged that the Canadian mobile messaging app operator offered and sold unregistered digital tokens called kin. Most companies that have been charged with conducting an unregistered ICO settled with the SEC. Kik challenged the Commission and argued that the lawsuit against was based on a “flawed legal theory” that cannot withstand judicial scrutiny. The SEC and Kik both filed motions for summary judgment, which is granted by a court if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.

SEC proved that Kik violated the federal securities law

On Monday, U.S. District Judge Alvin Hellerstein of the Southern District Court of New York granted the Commission’s motion for summary judgment and denied Kik’s. In his ruling, Judge Hellerstein noted that proving a violation of Section 5 of the Securities Act requires establishing three prima facie elements:

1. That the defendant directly or indirectly sold or offered to sell securities;
2. that no registration statement was in effect for the subject securities; and
3. that interstate means were used in connection with the offer or sale

According to Judge Hellerstein, both the SEC and Kik agree that all three prima facie elements are met.  The only disputed issue with respect to the sale of Kin to the public during the Token Distribution Event (TDE) was whether it was a sale of a “security.” Judge Hellerstein explained that the definition of “security” under Section 2(a)(l) of the Securities Act includes an “investment contract.” He added that courts rely on the test set forth in SEC vs. W.J. Howey Co. to determine what constitutes an investment contract. In the SEC vs. Howey, “An investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party,” as quoted by Judge Hellerstein in his ruling. The three elements of the Howey test include 1) an investment of money, 2) in a common enterprise, 3) with profits to be derived solely from other efforts of others, according to the judge.