The SEC Can't Keep Kik-ing the Crypto Can Down the Road

The latest example of the SEC's ambiguous approach is the launch of an enforcement action against Kik Interactive, Inc. Kik is a social media platform that began issuing its own cryptocurrency in mid-2017.

The SEC has a mandate to bring actions against individuals and firms that issue securities without registering the offering or adhering to an exemption.

More generally, the SEC has repeatedly stated that it will judge future cases by their individual "Facts and circumstances," which has not helped market participants understand its general approach.

The SEC has failed to provide an avenue for crypto issuers who - as seems to be the case with Kin's promoters - do not wish to offer a security and want to make that clear from the outset to prospective buyers.

As recently as last year, Chairman Clayton claimed that "All ICOs [he'd] seen [were] securities." Yet, in the more than 12 months since, the SEC has pursued three dozen enforcement actions against digital asset issuers.

A long-awaited guidance on digital asset offerings sought to outline, in plain English, the SEC's procedure for deciding whether a token offering is an investment contract regulated by the SEC. Unfortunately, the guidance turned the 70-year-old, four-pronged Howey test into a 40-point-plus list of potential reasons why the SEC might consider a token offering to be an offering of securities.

Kik and its supporters see the SEC's enforcement action as a chance to provide clarity for the crypto industry, and they have established a legal defense fund to that end.

Kin's offering certainly shares some features with other ICOs, such as Munchee, that have previously settled with the SEC and returned the funds raised to their investors.

Regardless of the outcome on the question of a securities law violation, a court might take a stab at defining decentralization, at last providing a reliable standard to establish which crypto projects fall under the SEC's remit.

Over the last two years, the SEC has missed several opportunities to give clear and consistent guidance about the regulatory status of cryptocurrencies.