On Sept. 12, Waterloo, Ont.-based Kik Interactive Inc., which operates a popular messaging app of the same name, will grant investors who preregister a chance to buy a chunk of its new cryptocurrency, called Kin.
The hype around cryptocurrencies and initial coin offerings has one of Canada's highest-valued startups jumping headfirst into the crowdfunding game in what could be the largest sale of virtual currency by a Canadian company.
On Sept. 12, Waterloo, Ont.-based Kik Interactive Inc., which operates a popular messaging app of the same name, will grant investors who preregister a chance to buy a chunk of its new cryptocurrency, called Kin.
Kik is hoping the token offering will do two things: grant it some additional capital and maybe offer a method to monetize its users' behaviour other than selling advertising inside chat feeds.
For subscribers: As Canadian regulators take aim at ICOs, questions about enforceability arise
The value of Kin is expected to be created by Kik's 15 million monthly active users, who would adopt it and reward each other for a variety of digital goods, such as making a shareable "sticker" image, posting a self-created song on SoundCloud or hosting a server for an online game.
What Kik is doing is much like an initial coin offering. ICOs are an emerging form of fundraising, in some cases similar to crowdfunding, in which companies sell digital "coins" or "tokens" to finance a new venture.
Kik announced the sale date and terms of its cryptocurrency offering just days after Canada's securities regulators warned that they will be taking a closer look at ICOs and whether they constitute securities. The Ontario Securities Commission and other regulators have issued notice that they will consider each ICO on a case-by-case basis.
The frenzy around the ICO market has led to some extreme outcomes: Millions have been raised and lost; projects have imploded or been shut down. Some investors liken it to penny-stock schemes powered by social media and there's almost zero oversight or protection for investors.
But Ted Livingston, the 30-year-old chief executive of Kik, says he's not getting in the ICO market: Kik is calling its sale of Kin a "token distribution event."
"The term ICO is very clever – it's obviously a play on the term IPO [initial public offering] – but it doesn't reflect what's actually happening," Mr. Livingston says.
An IPO requires filings with government regulators, disclosures about the underlying company, audits about financials and the participation of licensed brokers in the sale of the securities. "Tokens are different … the rules that apply to them are different," he says.
Chris Horlacher, CEO of Equibit Development Corporation , says the OSC's notice still leaves too much room for interpretation.
"The notice wasn't particularly helpful, because it didn't prescribe anything the industry could actually use and rely on."
The notice did offer some broad rules based on the 1946 Howey Test, which the U.S Securities and Exchange Commission uses to identify whether an investment product could be a security.
That test asks the following four questions: Is it an investment of money? Is it in a common enterprise? Is there an expectation of profit? Is there an expectation the profit would come significantly from the efforts of others?
Kik faces potential risk on each point. Kik has raised $50-million (U.S.) in presales of Kin and expects to raise another $75-million. And its entire strategy is to use Kin to generate economic activity and profit.
"Crypto for us is a new way to build a business model. It's about building an economy around a new cryptocurrency and setting aside some of that currency for yourself. In our case: 30 per cent," Mr. Livingston says. Indeed, only 10 per cent of Kin is going up for sale; the final 60 per cent will be disbursed over time by a Kik-controlled foundation.
"Are people buying Kin because they think it's going to go up in value? Yeah, certainly some people are … but that doesn't change it from a currency into a security," Mr. Livingston says.
Lawyer and blockchain entrepreneur Preston Byrne has become a prominent online critic of the notion that tokens are not securities.
"If something is sold with the expectation or intention that it's an investment, irrespective of what function that thing performs, it's going to be deemed an investment contract by the regulator," wrote the former securitization and derivatives lawyer in late August. The OSC's guidance on ICOs contained another gentle nudge: "In order to avoid costly regulatory surprises, we encourage businesses with proposed cryptocurrency offerings to contact their local securities regulatory authority."
When asked about Kik's ICO, a spokesperson for the OSC said in a statement: "We do not confirm or comment on any confidential discussions or correspondence with firms."
Mr. Livingston says his lawyers have consulted widely in Canada, the United States and abroad, but he added: "I am not going to comment specifically on who we talked to except to say we have talked to regulators.
"As a company that has received a billion-dollar valuation, we have a lot to lose. If it was just about the money, we would have done something else," Mr. Livingston says. "I think we feel really good about Kin as a utility-based currency, like Bitcoin and Ether. Everything we've looked at points to – based on existing laws – that this is not a security."