ICOs Here is how Kik Interactive Inc. described its digital currency, Kin, in a submission to the Securities and Exchange Commission last year: Since the [token distribution event], use of Kin as a currency has continued to increase as developers and consumers use it within the ecosystem. In fact, excluding secondary market transactions, as of today, Kin exceeds Ether and Bitcoin (which Director Hinman does not believe are securities) in daily blockchain activity, demonstrating Kin's wide acceptance and adoption. (See https://blocktivity.info/.) Indeed, of the over 2,000 tokens in circulation, Kin is ranked as having the fifth highest daily blockchain activity. Further, while not specifically designed for physical goods, Kin can be used to buy items such as sunglasses and vehicles. (See Mrs. Shivas, ThirdEyeSunglasses.com Will Now Accept Kin Coin, Third Eye Sunglasses, Jan. 2, 201813; see also Spectrum Auto Sales interview with "the Kin Realist," (accepting Kin for vehicles).) Moreover, there is a publicly available, open-sourced software developer kit ("SDK") that allows any developer to integrate Kin within his or her application. Notably, Kin in Kinit, discussed below, was the first cryptocurrency approved to be earned and spent in an Apple iOS application. Both the Google Play and Apple App Stores allow Kin to be used as a currency within their respective platforms, where Kin has also been adopted, integrated, and used in over 30 digital applications (the vast majority of which were not developed by Kik) … Notably, roughly half the applications that have integrated Kin were built specifically for Kin, showing that Kin has created the foundation for not only existing businesses to monetize, but for new businesses as well. Such usage only continues to grow as Kin moves towards being the most widely used cryptocurrency in the world. You get the idea. "Kin is a thriving medium of exchange," a digital currency that is widely used for actual transactions in a robust decentralized ecosystem. It is not a "security" that would be regulated by the SEC. People do not buy it for speculative profits, or as an investment in Kik; they buy it as a currency to buy, um, things in apps, or sunglasses. Or they build new apps that will accept and use Kin in new ways, ways that Kik hasn't thought of and has no control over. Applying traditional U.S. securities regulation to Kin would be nonsensical: Kin is not a security issued by Kik, but a decentralized currency that is open to anyone for useful, not investment, purposes. Here is how the SEC described Kin when it sued Kik yesterday for securities law violations related to its $100 million initial coin offering for Kin[1]: In late 2016 and early 2017, Kik faced a crisis. Fewer and fewer people were using Kik Messenger. The company expected to run out of cash to fund its operations by the end of 2017, but its revenues were insignificant, and executives had no realistic plan to increase revenues through its existing operations. In late 2016 and early 2017, Kik hired an investment bank to try to sell itself to a larger technology company, but no one was interested. Faced with a shrinking financial "runway," Kik decided to "pivot" to an entirely different business and attempt what a board member called a "hail Mary pass": Kik would offer and sell one trillion digital tokens in return for cash to fund company operations and a speculative new venture. And: From the outset, Kik saw investors and speculators as a crucial target audience for an ICO. For example, in a meeting on February 16, 2017, Kik's executives and directors discussed the need to craft an offering that would appeal to "cryptoinvestors" and the growing market for "cryptoassets," highlighting a "50% three-year CAGR [compound annual growth rate]" for such investments. At this meeting, Kik executives and directors anticipated that "Crowdfunders" "would invest in tradable digital tokens of a non-blockchain company if offered good risk-return potential." … In an email to several employees dated February 28, 2017, Kik's CEO described Kik's new "crypto story," which would be "a new way" to raise capital. He wrote that the company would "sell some [tokens] to crypto investors to raise money," and that "[m]ore demand" for the token would mean "[v]alue goes up" and, therefore: "Buy today, sell tomorrow, profit." And: On or about April 10, 2017, in advance of a meeting of Kik directors later that same week, Kik's CEO sent to the directors his PowerPoint presentation for the meeting, entitled "Kik & Cryptocurrency," together with a report prepared by Kik's consultant. The materials highlighted results from the consultant's "Cryptoinvestor Survey" and "Cryptoinvestor Expert Panel" and 12 included a "Funding perspectives" slide showing revenues from average historical token sales and predicted a capital raise of "$100 million easily" from the offering. The materials set forth a "roadmap" for a token sale later that year and included steps for an "investor marketing plan" and an "exchange outreach." You get the idea. Kin started out not as a functional decentralized currency that people could use to buy sunglasses, but as a way for a troubled company to raise financing from not-especially-picky ICO investors. It was marketed to those investors not primarily as a useful way for them to buy stuff in apps, but as a get-rich-quick speculative investment. Now there are some factual disputes here: For instance, Kik denies that it primarily marketed Kin as a speculative investment, and honestly the SEC's own complaint doesn't make that case all that convincingly.[2] On the other hand, speaking as a crypto outsider, I have some trouble evaluating Kik's claim that Kin is super useful and widespread. If a credit card company was like "our card is accepted at places including ThirdEyeSunglasses.com and Spectrum Auto Sales," you would be … nervous … no? It doesn't sound like a $100-million-plus ecosystem, and in fact it isn't; the total value of all Kin in circulation today is only about $17 million, much less than Kik took in by selling them originally. But for the most part my takeaway is that both of these accounts could be entirely true, and I suspect that both of them mostly are. Let's say that Kin has been fairly broadly adopted as a useful currency across a decentralized ecosystem, and that it is being used by people for applications that have nothing to do with Kik. But let's also say that Kin started as a way for a struggling company to raise $100 million of financing from public investors by promising them an investment return without much in the way of financial disclosure or other protections that public securities investors usually get. Then what? I mean, here is the SEC's takeaway, and if you are at all familiar with U.S. securities law—as, say, the judge who will consider this lawsuit probably is!—it is just an open-and-shut case: Investors' purchases of Kin were an investment of money, in a common enterprise, with an expectation of profits for both Kik and the offerees, derived primarily from the future efforts of Kik and others to build the Kin Ecosystem and drive demand for Kin. Consequently, Kik's offer and sale of Kin in 2017 was an offer and sale of securities. Yeah, that'll do it. When Kik offered Kin in 2017, it looked more or less exactly like a securities offering, but it didn't comply with the securities laws, so it should have to give back the money and otherwise get in trouble. We talked about this brewing conflict last week, and I pointed out that the SEC's basic mission is to regulate fundraising by companies from public investors. By that standard, the Kin ICO was absolutely at the very core of what the SEC regulates: a risky, highly speculative investment in a troubled company with limited disclosures, limited investor protections and governance rights, and widespread marketing to retail investors. I can't really see how the SEC could have done anything other than sue here. Kik would probably disagree with a lot of that, but their main argument is not so much that the SEC is wrong about its own standards; it's more that those standards should be changed because they are stifling innovation. This is not at all a trivial point. Kik's own picture of the Kin ecosystem, in 2019, sounds pretty good, and not much like a security: It's a currency that is used to buy and sell actual things in a diverse range of settings that are not controlled by any one company. It's like Bitcoin (not a security), or even dollars; regulating it as a security would be unnecessary and counterproductive andsort of incoherent. If the current Kin ecosystem had just sprung into being ex nihilo yesterday, the SEC might be fine with it. It didn't, though; it sprang into being in 2017 with a corporate financing transaction marketed to retail investors with inadequate disclosure. Yes, fine, bad! But Kik's very fair point is that ecosystems generally don't spring into being ex nihilo; someone has to build them. That someone was Kik, and it raised money to build the ecosystem that everyone could enjoy by selling the tokens that would be used in that ecosystem. This is the basic innovation of crypto and ICOs, the possibility of funding the construction of an un-owned decentralized ecosystem by pre-selling the tokens that will run that ecosystem. By reaching back to declare the Kin ICO illegal, the SEC makes that innovation basically impossible, at least in the U.S. I remain optimistic that there might be a way to thread the needle here: You raise money in a securities offering to build the ecosystem, build it, and then once it is actually operating you issue non-security tokens to people who want to use the ecosystem. This is not at all perfect—the ecosystem can't really work until the tokens are widely held, so there's a chicken-and-egg problem—but maybe you can manage it. A classic way to do it is with a "simple agreement for future tokens," or SAFT. Kik actually tried this—it raised almost half of the $100 million from accredited investors in a SAFT—but, from the SEC's perspective, it sold its tokens publicly before the ecosystem was really working. You could put some blame on both sides here: On the one hand, the SEC is not really going out of its way to recognize good-faith efforts to do crypto innovation within a securities-law framework, and this action might deter future legitimate SAFT sales; on the other hand, sure, yeah, the tokens didn't have all that much utility when Kik sold them to the public. This case is being watched closely by crypto fans and venture capitalists, some of whom have contributed to a fund called "Defend Crypto" to support Kik. Perhaps they are right that crypto offerings need their own new form of regulation that allows for innovation and fundraising to build decentralized ecosystems, one that tailors disclosure requirements to the structure of token sales and that allows for free trading once a token becomes useful. That wouldn't help Kik, really, which did its ICO under current regulations and seems to have violated them, but maybe it's a good idea anyway. But it would probably require some movement from both sides. U.S. regulators and lawmakers would have to allow public sales of speculative investments without the full protections of the securities laws, but ICO issuers would have to stop using those sales as general-purpose corporate financing transactions. If you want to sell tokens to build an ecosystem that no one will own, maybe you should be allowed to. If you want to sell tokens to bring in a lot of money to your corporation, and then build a decentralized ecosystem that doesn't do much while keeping most of the money for yourself, maybe that is a securities offering and maybe you should get in trouble. Blockchain blockchain blockchain Here you go, chicken blockchain: French retailer Carrefour SA has seen sales boosted by the use of blockchain ledger technology to track meat, milk and fruit from farms to stores and will extend it to more products to increase shopper trust, an executive said on Monday. … Carrefour has launched blockchain information for 20 items including chicken, eggs, raw milk, oranges, pork and cheese, and will add 100 more this year with a focus on areas where consumers want reassurance, like baby and organic products. "You are building a halo effect - 'If I can trust Carrefour with this chicken, I can also trust Carrefour for their apples or cheese,'" Emmanuel Delerm, Carrefour's blockchain project manager, told Reuters at a conference. … Customers can scan a QR barcode on a pomelo grapefruit with their phone and find out the date of harvest, location of cultivation, the owner of the plot, when it was packed, how long it took to transport to Europe and tips on how to prepare it. "The pomelo sold faster than the year before due to blockchain," Delerm said. "We had a positive impact on the chicken versus the non-blockchain chicken." What is interesting here is that it is a perfect inversion of the idea of blockchain. The dream of blockchain was that it could eliminate the need for trust, or rather reduce that trust to objective technological code. Rather than rely on old-fashioned, subjective, insecure indicators of reputation, you could just go to the blockchain and check things out for yourself. This was always an idea that appealed more to computer programmers than to regular people. (I seem to recall a proposal to eliminate drivers' licenses and instead put driving records on the blockchain, so you could ... download them … in your car … and … steer away from … bad drivers … or something?) But it was an interesting idea, anti-elitist and libertarian and techno-futurist, one that seemed to have big implications for upending traditional relationships and power structures. What if we replaced the imperfect and biased human networks of trust with new and more perfect blockchain networks of proof? Well, I mean, imagine it with a chicken. Imagine every time you go to a grocery store, scanning a little code on every product and looking into its provenance. People apparently do some of this at Carrefour—"with some people spending as long as 90 seconds reading the provenance information," and "with one video of a farmer with his chickens proving popular"—but it would be exhausting to do that for every item every time you buy groceries. More importantly, though, the people watching the chicken videos probably aren't also examining the source code for the proprietary Carrefour blockchain to make sure that it works as advertised. You can put a QR code with a link to a happy video on any old factory-farmed chicken! Who would check? How would they check? No, come on, from the shopper's perspective what is happening here is that a big trusted brand-name retailer is slapping a sticker on some of its products saying "you can extra trust us on these products." The extra trust comes from Carrefour's own reputation—they wouldn't lie to you about this chicken being extra trustworthy, would they?—but also from the reputation of the word "blockchain," which everyone knows is a way of signaling extra trustworthiness, even if they don't know the details of how Carrefour's ledger is maintained or how it assures accuracy. And by signaling extra trustworthiness, well: "You are building a halo effect - 'If I can trust Carrefour with this chicken, I can also trust Carrefour for their apples or cheese.'" The cheese isn't on the blockchain. But the blockchain was never what mattered. Here in the U.S., Whole Foods Market has its own extra-trustworthiness stickering system for animal welfare, complete with a video,[3] but there's no blockchain: Whole Foods tells you that the animals were treated well and you believe them. Blockchain may or may not be more effective at getting you to believe it, but I suspect the difference has very little to do with the cryptographic structure of how blockchain data is maintained. It is another imperfect, bias-prone, human method of creating trust and reputation. It works if the reputation of blockchain, and of the companies that use it, is good, and it doesn't if it's not. Everything is seating charts We talked on Monday about a very weird proxy fight at Texas Pacific Land Trust. The short version of the story is that TPL had a shareholder meeting scheduled, but it looked like it might lose its proxy fight, so TPL cancelled the shareholder meeting the day before it was scheduled to happen. But the dissident shareholders showed up anyway, conducted the meeting, and declared themselves victorious. I don't think that it works that way, but the dissident shareholders do, and now everyone is suing one another. But I made one important mistake on Monday (since corrected in the published column, though of course still wrong in your email inbox if you read this column that way). I originally wrote, about the disputed meeting: Awkwardly it was at the offices of TPL's law firm, and TPL had canceled the meeting, but for some reason TPL's lawyers let Oliver use a conference room anyway. I wrote that because I thought it's what the dissident shareholders' lawsuit said. But I was wrong. What that lawsuit said was "Mr. Oliver and dozens of shareholders arrived at the meeting location, and were properly routed by building security and personnel of TPL's counsel to a conference facility on the fifth floor of the building." Sure, that sounds like they went to the scheduled meeting location, at TPL's law firm, and then used the law firm's conference room to hold their own meeting. But that's not exactly what it says. No, here is what actually happened, according to TPL's amended lawsuit: The Dissident Group and a few dozen shareholders gathered on a different floor of the office building in which Sidley Austin LLP's offices are located (the "Invalid Meeting"). The Dissident Group did not provide any formal notice that it would be holding the Invalid Meeting at that location. Even though the Trust's counsel corresponded with Defendant, his counsel, and his proxy solicitor approximately 90 minutes prior to the Invalid Meeting, the Dissident Group did not inform the Trustees or the Trust's counsel about their plan to hold the Invalid Meeting. Prominently displayed in the lobby of the building in which the Invalid Meeting occurred was a sign informing shareholders that the actual Special Meeting had been postponed. Attorneys for Defendant were re-directing shareholders to attend the Invalid Meeting on another floor of the office building. Ahahahahahahaha what? What? They didn't hold their meeting at TPL's law firm; they held it on a different floor of the same building. And then, in the lobby of the building, TPL's lawyers put up a sign saying "no meeting," and the dissidents' lawyers stood around in front of the sign saying "no no of course there's a meeting, fifth floor, no problem." So I am sorry for my error, but not very sorry, because this is amazing. Honestly I quit right now, I'm going back to being a corporate lawyer, how fun are proxy fights? Things happen Wall Street Broker Conflict Regulation Set for Approval by SEC. Woodford 'Extremely Sorry' About Cash Freeze in Somber YouTube Video. DE Shaw staff get ultimatum over non-compete contracts. Climate scientists partner with McKinsey to push companies to self-regulate. Deutsche Bank Funding Costs Subdued Despite Share-Price Slide. JPMorgan Revives Forced Arbitration for Credit-Card Customers. Wells Fargo Pledges $1 Billion for Affordable Housing in Philanthropic Push. "A query of Crunchbase data rolled out more than 50 companies funded in the past couple years that mention pizza in their business descriptions." Jeff Bezos Is Buying Three NYC Condos Worth a Combined $80 Million. Philip Falcone Sets NYC Record With Nearly $80 Million Townhouse Sale. Unicorn, Comeback Symbol of Scottish Independence, Is a Hit With Little Girls. Microsoft is making Xbox body wash. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Kik raised $100 million by selling Kin, but about half of that was sold "to professional investment funds and other select, wealthy investors using purchase agreements that Kik called 'Simple Agreements for Future Tokens' or 'SAFTs.'" Those would presumably be legal exempt offerings of securities (as private placements to accredited investors); only the other half of the sales—direct to the general public—would be illegal. [2] Mainly what I mean here is that a lot of what the SEC cites as Kik's promises of investment returns can also be read as promises that Kik would work to make the Kin ecosystem useful, and thus to make Kin a useful utility token (or currency) rather than an investment. That should be what you want! Similarly, Kik thought it was important to build a "minimum viable product," an actual app that would use Kin as a utility token, before doing a public offering of tokens. This strikes me as a *good* fact, an indication that Kik took the securities laws seriously and wanted to market Kin as a useful currency rather than just a speculative investment. But the SEC reads it the other way, putting a lot of stress on the word "minimum" in "minimum viable product," and making fun of the utility of that app. (Which involved getting stickers in a chat app, so, yeah, fair.) To Kik, rolling out an app that used Kin was a good-faith effort to comply with the law; to the SEC, it was a fig leaf to cover up noncompliance. [3] To be fair, it's a video of a meat counter, not a farm, which does not inspire quite as much confidence. |
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