As ICO regulatory landscape gradually takes shape, Kik Interactive excludes Canadians from Kin token sale

On September 7, 2017, Kik Interactive Inc. (Kik), a Waterloo-based digital messaging company, announced that it would not permit Canadian investors to purchase its “Kin” crypto-tokens in its currently ongoing public sales process. Kik had previously announced plans to sell up to U.S.$125 million of Kin tokens, including to Canadians. Kin tokens are envisioned as a general purpose cryptocurrency for use in services such as chat, social media, and payments, all within the Kin ecosystem.

The announcement was made in a blog post by Kik Chief Executive Officer Ted Livingston, who cited “weak guidance” from the Ontario Securities Commission (OSC) regarding whether Kin tokens are securities as the reason for banning Canadians. The OSC later clarified to the National Post that they had reviewed the Kin token and concluded that it is a security, but that they were willing to grant Kik exemptive relief from certain securities law requirements provided additional protections were granted to retail investors.

While Kik’s submissions to the OSC and the details of the OSC’s conclusion are not public, the OSC’s conclusion nevertheless provides some regulatory guidance at a time when industry participants are eager to determine precisely when tokens will be subject to securities laws. Another example of such guidance was provided in the case of Impak’s MPK tokens, which are designed to allow holders to purchase goods and services from like-minded merchants operating within the “impact” economy. Similar to Kin, the MPK tokens are considered a security, in this case by both the Autorité des Marchés Financiers in Quebec (AMF) and the OSC.

Industry participants understand the challenging position that regulators are in, but have also been hopeful that tokens that have a commercial purpose or utility beyond speculative investment, such as purchasing goods and services, would fall outside of securities laws. “Purpose” or “utility” tokens might fall outside of the test established in the leading case on the analysis of what instruments are securities (Pacific Coast Coin Exchange v. Ontario Securities Commission (Pacific Coast)), namely because the holder of such a token would not have an “expectation of profit”, which is one of the stated elements of a security in that test. If anything, the holder would have an expectation of fulfilling the applicable commercial transaction. Both Kik and Impak’s tokens had clear purposes, but considering the conclusions drawn by the OSC and AMF, the regulators must have determined other elements of a security are evident.

What is frustrating for industry participants, though, is that what contributes to that determination remains uncertain. In a Timely Disclosure blog post from August 30, 2017, we speculated that regulators would consider in determining how to regulate issuers and tokens, in addition to the purpose of a token, such matters as what happens to the token after it is “used up”, the extent and nature of marketing efforts by the issuer, representations regarding a secondary market in the tokens, the monetary policy underlying the tokens, the maturity of the platform at the time of the token issuance and the tax treatment of the revenue from the token sale.

We developed that list with regard to the Pacific Coast test and based on the Impak decision we continue to think those are all relevant considerations. We don’t know, however, how regulators will apply and weigh those factors (or others) in analyzing a particular token. In addition, regulators have not disclosed whether they have concluded that any particular tokens are NOT securities.

Securities regulators are encouraging potential token issuers to engage with them directly and while that remains feasible today while the industry continues to develop, we expect it will soon become cumbersome for regulators to meet with every company that wishes to issue tokens. Accordingly, we believe it is important for regulators to provide as much information as possible to industry participants as they develop their regulatory approach.