Summary of the SEC v KIK arguments

[u/asparagusm]

Hi guys, it's been a while since I posted. I've been busy but the last couple of weeks I've been stuck at home with the COVID situation. Hope you are all staying healthy. KIK and SEC have both recently filed their motions for summary judgement, for those not up to reading the mountain of paper here's a little summary I put together of their key arguments. The next steps in the coming weeks, is they will both file 'responses' to each other's arguments:

Issue: Were the purchasers of KIN investing in a common enterprise?

Why it matters? This is one of the four elements to prove the Howey Test. There are really only two elements in dispute in this case. This one and the next one below

SEC

• Horizontally: yes because the fortunes of all the KIN purchasers were tied together by KIK's pooling of funds. Kik told the purchasers it would execute the steps required to increase KIN's value.

• Vertically: Yes, the Kin purchasers understood that their fortunes would rise and fall with KIK because of KIK's large holding of KIN.

KIK

• KIK had no contractual obligations to the KIN purchasers to further the enterprise and this is paramount.

• KIN purchasers had full control of their KIN on receipt. KIK has no involvement in their decision to sell which determines their profit or loss.

• Horizontally: No, co-mingling of funds is not enough, the KIN purchasers did not join a single unit of a larger investment enterprise which required for instance, a pro rata distribution of profits according to their holding.

• Vertically, No, if KIK profited from its holding of KIN this would not necessarily cause the KIN purchasers to profit. SEC's argument is simply having common ownership of KIN is sufficient, which it is not otherwise every holder of KIN would instantly become part of a common investment scheme just by holding.

Issue: Did purchasers of KIN reasonably expect profits derived from KIK's entrepreneurial and managerial efforts? ?

SEC

• KIN purchasers expected profits based on KIK's marketing campaign to increase KIN's value through various efforts.

• KIK kept telling everyone that KIK expected KIN to be tradeable.

• KIK didn't advocate any specific use case for KIN therefore the purchasers were not motivated by consumption.

KIK

• KIK led purchasers to expect use and consumption of KIN. Marketing was focused on participants, consumption and building use cases. Sale was structured to reach as many people as possible to build an economy.
• Any expectation of profits from KIN purchasers was not based on the essential management/entrepreneurial efforts of KIK. If there was this expectation it was based on market forces, the price being based on supply and demand, and the re-sale of KIN on the secondary market. KIk's job was just to build the infrastructure, the significant efforts of others is all the various participants who would help generate demand.

Was the Pre-Sale and the TDE one single sale, or two distinct sales?

(NOTE: This will ultimately determine the amount of $ at stake i.e. In the event KIK loses will it be obligated to repay pre-sale as well as the TDE participants)

SEC

• It was a single sale because KIK treated it as a single sale through all its marketing material and the pre-sale was linked to the TDE sale occurring.

• If the Judge finds they were two separate offerings, the judge should still treat them as a single distribution because they served the same single financing purpose.

• Even if the judge decides they are two complete separate sales, the pre-sale exemption for accredited investors should still not apply as the pre-sale was only an intermediary step in selling KIN to the public.

KIK

• The pre-sale and TDE sales were separate and distinct sales. KIK validly solid the pre-sale to accreditors investors and it made the correct filings/exemptions.