The value of bitcoin is up 102% in 2019.

But the most important story playing out in the cryptocurrency world right now is an enforcement action by the SEC against Canadian chat app Kik Interactive.

If you follow cryptocurrency at all—either as a speculative investor or as a believer in the technology—you should pay close attention to what happens next.

On Monday, the SEC sued Kik for its “unregistered” ICO (initial coin offering) back in 2017, which the agency says was an illegal securities offering. In the token sale, Kik created and sold 1 trillion Kin tokens and raised $100 million; the SEC says $55 million of that came from U.S.-based investors. It was one of the five biggest ICOs of 2017.

“This is the thing that everyone in the industry is dealing with”

Kik, which has about 200 employees, knew the SEC action might be coming: In November 2018, the SEC issued Kik a Wells Notice, which informs companies that the agency is considering enforcement action. In a Medium blog post in January, Kik CEO Ted Livingston responded to the notice, promising that “We’re fighting back.”

In that blog post, Livingston correctly wrote, “This is the thing that everyone in the industry is dealing with, but nobody wants to talk about... This situation is not unique to Kik. There are dozens of projects at a similar point with the SEC.”

As Yahoo Finance reported last year in a joint investigation with Decrypt, the SEC had been reaching out to dozens of companies that conducted ICOs to request documentation or threaten enforcement—and in many cases quietly got settlements. But in November 2018 the SEC’s crusade against unregistered token sales got a lot less quiet when it publicly announced a handful of settlements. That month it also slapped boxer Floyd Mayweather with more than $600,000 in fines and rapper DJ Khaled with $152,000 in fines for promoting ICOs on their social media accounts.

Setting the enforcement standard for token sales

This new lawsuit against Kik is the most noteworthy enforcement action to date, and the result will be important for the entire industry. It might set the new standard of how companies conduct an ICO, if any still dare to try it. (Blockstack is already looking to pull off the first big ICO conducted with full SEC registration and approval.)

The core issue the SEC has with ICOs is simple: it believes almost every token sale is a security offering. SEC Chairman Jay Clayton made that stance clear at a Senate hearing in February 2018 when he said, “I believe every ICO I’ve seen is a security.”

The SEC bases its view on SEC v. Howey, a 1946 case involving the selling of shares in a citrus grove. The SEC applies the Howey Test to determine whether an offering is raising money from investors in a common enterprise with the expectation of profit from the efforts of others.

In its official Wells Response in November 2018, Kik retorted that buyers of Kin coins “were not led to expect profits from the efforts of others.” Kik CEO Livingston also makes the case that Kin is truly used as a currency and not a security, since Kik users can earn and spend Kin inside the Kik app and in other apps as well.

Now it’s worth revisiting what Livingston said in interviews back in 2017 about the Kin ICO. In an interview with Yahoo Finance, he said, “Kin is a new way for us to monetize and compete... If supply [of Kin] stays constant and demand for it grows, the value of the cryptocurrency will grow. So that if we set some of it aside for ourselves, we can make a lot of money... If we can create Kin, integrate it into Kik, that will make it really valuable.”

Does that sound like a company promising returns from a securities offering? The SEC believes it does. In the 49-page complaint, the SEC writes: “Kik marketed the Kin tokens as an investment opportunity. Kik allegedly told investors that rising demand would drive up the value of Kin.”

The SEC also accuses Kik of resorting to an ICO as a “hail Mary pass” because the company was “faced with a shrinking financial runway” and “decided to pivot.” And indeed, in the same 2017 interview with Yahoo Finance, Livingston made the point that Kik and other tech startups needed to innovate and try new things in order to avoid getting “copied and crushed” by giants like Facebook.

But the SEC’s lawsuit against Kik is no guaranteed win. Kik, which says it has 15 million monthly users, clearly does not intend to settle, even though it has already spent $5 million in legal fees dealing with the SEC. Buckle up now for a battle over the future of token sales.

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Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.

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