The U.S. Securities and Exchange Commission has finally sued Kik Interactive Inc. for conducting an alleged illegal initial coin offering a week after the company itself started crowdsourcing donations for the fight.

The SEC alleges that the ICO was illegal because Kik sold the tokens to U.S. investors without registering their offer and sale as required by U.S. securities law.

Kik raised $98 million in the ICO in 2017, including $50 million in presales, for Kin, an Ethereum blockchain-based cryptocurrency that was pitched both as allowing the company to expand Kik’s features and supporting developers with an open app ecosystem.

The disagreement between to the two comes down to the SEC claiming that Kik sold the Kin tokens as an investment opportunity while Kik claims that that the ICO was for a currency and not an investment opportunity under securities law.

Among the allegations leveled at Kik are that the company told investors that rising demand would drive up the value of Kin. The pitch was tied to Kik incorporating the tokens into its messaging app, creating a new Kin transaction service and building a system to reward other companies that adopt Kin.

The SEC noted that the products did not exist at the time of the ICO and that there was nothing to purchase at the time using them. Further, it noted that Kik kept three trillion Kin tokens which the company would trade on secondary markets allowing them to profit alongside investors, making them securities transactions.

“Kik told investors they could expect profits from its effort to create a digital ecosystem,” Robert A. Cohen, chief of the SEC Enforcement Division’s Cyber Unit said in a statement. “Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.”

Kik Chief Executive Officer Ted Livingston, who is previously on record as saying that the SEC action is a test case for ICOs, responded to the news by saying that “this is the first time that we’re finally on a path to getting the clarity we so desperately need as an industry to be able to continue to innovate and build.”

Investors didn’t take the news well. The price of Kin dropped almost 30% in trading today. The market cap of Kin tokens is now $18.9 million, down around 80% since its IPO.

The SEC is suing Kik with violating the registration requirements of Section 5 of the Securities Act of 1933.  The lawsuit seeks a permanent injunction, disgorgement plus interest and a penalty.

Image: Kik