Are cryptocurrencies considered to be securities for the purposes of securities regulations?

(a) Definitions

When used in this subchapter, unless the context otherwise requires-

(1) The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

[...]

"Section 5 [of the Securities Act] provides that it is unlawful for any person to use the channels of interstate commerce to sell a security unless a registration statement is in effect as to such security." SEC v. Verdiramo , 890 F. Supp. 2d 257, 268 (S.D.N.Y. 2011) ; see also 15 U.S.C. § 77e. "To prove a violation of Section 5 requires establishing three prima facie elements: (1) That the defendant directly or indirectly sold or offered to sell securities; (2) that no registration statement was in effect for the subject securities; and (3) that interstate means were used in connection with the offer or sale." SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 422 (S.D.N.Y. 2007); see also SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006). With respect to the sale of Kin to the public (the TDE), the only disputed legal issue is whether the was the sale of a "security"; the parties agree that all other elements under Section 5 are met.

Under Section 2(a)(1) of the Securities Act, the definition of "security" includes an "investment contract." 15 U.S.C. § 77b(a)(1). In determining what constitutes an investment contract, courts rely on the test set forth in SEC v. W.J. Howey Co.: "[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." 328 U.S. 293, 298-99, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); see also Revak v. SEC Realty Corp. , 18 F.3d 81, 87 (2d Cir. 1994) ("three elements of the Howey test" are "(i) an investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others"). In this analysis, "form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

Few courts in this Circuit have had the opportunity to apply Howey in the context of cryptocurrency. The Second Circuit has not yet spoken on the issue, and two district court decisions, while instructive, present important distinctions in their facts. See SEC v. Telegram Group Inc., No. 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (granting preliminary injunction to prevent planned distribution of digital tokens because there was a substantial likelihood that SEC would succeed in proving that plan constituted unregistered securities offering); Balestra v. ATBCOIN LLC , 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (denying motion to dismiss in putative class action alleging that company sold unregistered securities through offering of digital tokens). I have to decide this case without benefit of direct precedent in relation to cryptocurrencies. I do so, understanding that the definition of investment contract is "a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Howey, 328 U.S. at 299, 66 S.Ct. 1100.

On April 3, 2019, the SEC published its “Framework for ‘Investment Contract' Analysis of Digital Assets, ” in which it “provided a framework for analyzing whether a digital asset is an investment contract and whether offers and sales of a digital asset are securities transactions” (the “SEC Framework”).^[3] (Am. Compl. ¶ 99.) The SEC Framework is derived from the Supreme Court's “Howey test,” which defines an “investment contract” under the securities law as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Securities and Exchange Commission v. W. J. Howey, Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103 (1946).

The SEC Framework sets forth four prongs that are considered in determining whether a digital asset is a security. First, a party must make an investment of money or other valuable consideration. According to the SEC, the first prong is typically satisfied in an offer and sale of a digital asset. (Am. Compl. ¶¶ 101-02.) Second, the investment must be in a “common enterprise, ” which also typically exists in the offer and sale of a digital asset “because the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter's efforts.” (Am. Compl. ¶¶ 101, 104.) Third, investors must have a “reasonable expectation of profit.” (Am. Compl. ¶¶ 101, 107.) Fourth, the profits are expected to be “derived from the efforts of others.” (Am. Compl. ¶¶ 101, 114.) As alleged by Williams, “the Framework identifies a series of factually intense questions underscoring ... the challenges a layperson

4

would face in analyzing whether a digital asset constitutes a security.” (Am. Compl. ¶ 109.) Indeed, the Amended Complaint's description and listing of the various characteristics to be assessed spans more than seven pages of the Amended Complaint. (Am. Compl. ¶¶ 109, 114, 118, 119.)

A complex patchwork of federal and state laws regulates the issuance and sale of securities. These statutes include the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78a et seq. But these regulations apply only to investment products that qualify as securities under these statutes. For the purpose of federal law, a "security" is defined as, inter alia, an "investment contract." 15 U.S.C. § 77b(a)(1). The Supreme Court has defined an "investment contract" as a "contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). This analysis, which is commonly called the Howey test, may be applied to determine whether a given investment product qualifies as a security and is thereby subject to a number of

Page 10

federal regulations applicable only to covered securities. Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir. 1994).

Bibox claims that the BIX token, as well as the five other tokens at issue in this litigation, are not securities under the Howey test. Similarly, the issuers of the five tokens not issued by Bibox have each claimed that its tokens are not securities under this legal standard.² The issuers also did not register the tokens as securities with the SEC.

On April 3, 2019, the SEC published a Framework for Investment Contract Analysis of Digital Assets (the "Framework"), which "provided a framework for analyzing whether a digital asset is an investment contract and whether offers and sales of a digital asset are securities transactions." In this Framework, the SEC essentially provided a gloss on the Howey test that applied the Howey analysis to crypto-assets. The Framework provides a means of assessing whether purchasers of crypto-assets invested money, participated in a common enterprise, expected profits, and expected that those profits would be solely derived from the managerial efforts of others, as set forth in Howey. With respect to the "expect[ed] profits" and "profits solely from the efforts of [another]" elements of Howey, the Framework sets forth lengthy non-exhaustive lists of

Page 11

characteristics of crypto-assets that should be considered in assessing whether a given crypto-asset satisfies those elements of the Howey test.

Additionally, the issue of whether a particular token is in fact a security has significant consequences for each of the claims alleged in the complaint, and that determination involves an application of the Supreme Court's Howey test. That test is a fact intensive inquiry and will reach a result that depends on the unique characteristics of each token. Thus, even for the five tokens built on the ERC-20 platform and sold on the Bibox exchange, some may be covered securities and others not.

Despite Defendant's argument (cf. Docket No. Def. Reply Memo. at 4 & n.3), if not regulated by the Federal Deposit Insurance Corporation cryptocurrency may be traded as securities or commodities, U.S. Sec. & Exch. Comm'n v. Kik Interactive Inc., 492 F.Supp.3d 169, 177-82 (S.D.N.Y. 2020) (securities); Williams v. KuCoin, No. 20-CV-2806,

8

2021 WL 5316013, at *2 (S.D.N.Y. Oct. 21, 2021) (Lehrburger, Mag. J.) (Report & Rec.) (in 2019, Securities and Exchange Commission issued “Framework for ‘Investment Contract' Analysis of Digital Assets” stating four prongs in determining whether a digital asset was a security); see In re Bibox Group Holdings, supra, 534 F.Supp.3d at 331 (in 2019, the SEC concluded that EOS issued by Block.one was a security under the 1933 Securities Act); Commodity Futures Trading Comm'n v. McDonnell, 287 F.Supp.3d 213, 228 (E.D.N.Y. 2018) (Weinstein, J.) (commodities) (Docket No. 9, Pl. Memo. At 8, 9 & n.5). In CFTC v. McDonnell, Judge Jack Weinstein held that

“Virtual currencies can be regulated by CFTC as a commodity. Virtual currencies are ‘goods' exchanged in a market for a uniform quality and value. Mitchell Prentis, Digital Metal: Regulating Bitcoin As A Commodity, 66 Case W. Res. L. Rev. 609, 626 (2015). They fall well-within the common definition of ‘commodity' as well as the [Commodity Exchange Act's]] definition of ‘commodities' as ‘all other goods and articles ... in which contracts for future delivery are presently or in the future dealt in.' Title 7 U.S.C. § 1(a)(9).” Id. (emphasis added).

Securities regulation arises in the cited cases from the public sale of digital assets, Kik Interactive, supra, 492 F.Supp.3d at 174, 177-82; In re Bibox Group Holdings, supra, 534 F.Supp.3d at 331; Williams, supra, 2021 WL 5316013, at *2; see also 15 U.S.C. § 77e(a) (prohibition of sales in interstate commerce or the mails of unregistered securities). In Kik Interactive, defendant Kik Interactive conducted a private initial offering of Kin tokens with advice to buyers that the instrument they purchased was a security but not registered under any nation's securities laws, Id. at 181-82. The district court held that the private pre-sale of the Kin tokens was a part of an integrated offering followed by the public sale of the tokens, 492 F.Supp.3d at 181-82. The court concluded that this

9

private pre-sale and public offering of defendant's Kin tokens was a public sale of securities requiring a registration statement, Id. at 177-82.

This conclusion, that a public sale of cryptocurrency is the sale of securities regulated under the Securities Act, however, postdates Plaintiff's present claim and occurred during the time of Defendant's denials of coverage. There is no allegation here of any public purchase or sale of Plaintiff's EOS cryptocurrency or public registration of the cryptocurrency. Plaintiff alleges his EOS cryptocurrency is a private asset not in a government-regulated account, declaring that he “maintained a private EOS cryptocurrency account” (Docket No. 1, Ex. A, Compl. ¶ 7). Defendant's Policy insured traditional currency accounts held by recognized institutions rather than the novel and evolving area of cryptocurrencies.

The EOS token is a crypto-asset that was created by the issuer Block.one and initially offered for sale in June 2017. EOS has been listed for trading on the Bibox exchange since December 3, 2017. Block.one described EOS as a technologically superior competitor to Bitcoin and Ethereum. Like BIX, EOS was

Page 7

created via a centralized process, rather than through the decentralized mining process used to create Bitcoin and Ethereum.

In 2019, the Securities and Exchange Commission ("SEC") concluded that EOS was a security under the 1933 Securities Act. The SEC further found that Block.one had violated the 1933 Securities Act by selling EOS as an unregistered security. Block.one paid a $24 million settlement to the SEC for its securities law violations related to its sale of EOS. Block.one is not a defendant in this litigation.

Helbiz Coin (the "token"), the cryptocurrency at the center of this case, is a security.

The Securities Act of 1933, 15 U.S.C. § 77b(a)(1), and the Securities and Exchange Act of 1934, 15 U.S.C. § 78c(a)(10), both include "investment contract" in their definitions of the term "security." The United States Supreme Court has defined "investment contract":

Page 4

In other words, an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.

S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). That definition "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." Id. at 299.

Helbiz Coin satisfies the Howey definition. Defendants treated the token as an investment from its inception. The Helbiz Coin Whitepaper's discussion of the initial coin offering ("ICO") states

In order to further develop the platform, Helbiz will conduct a token generation event that will offer 520.000.000 HBZ tokens of the 1 billion total supply. The funds raised will be used for development of the Helbiz platform, business development; onboarding new car owners, rentals, dealerships, collaborate with insurance and PR & Marketing companies to raise project awareness, token usability while at the same time building a strong local community.

Helbiz Mobility System Whitepaper, Ex. J to Plaintiffs' Motion for Preliminary Injunction, at 17. Helbiz and its CEO Salvatore Palella described how the Helbiz transportation platform and the token were a common enterprise:

Page 5

- "We are now only focused on launching and scaling operations, creating value for early investors and the #HBZ coin." Id. ¶¶ 87, 124.

- "Helbiz is focused on the long term success of HBZ and therefore the team [is buying] $1m (USD) of HBZ on the open market, paired with additional large buy walls on the main exchanges, to strengthen the company's position both internally and to new investors #Helbiz." Id. ¶ 120(I) (alteration in original).

They also worked to get the token listed on various cryptocurrency exchanges:

A. The tweet from PALELLA on May 31, 2018: "May has come to an end. @Helbizofficial is more attainable and launched on 11 exchanges, finished our updated UI for our apps, acquired a new office in NYC and will now focus on the press aspect globally. #hbz #Helbiz."

B. The tweet from PALELLA: "Eventful first 60 hours of the week, with our third exchange of the week - @Helbizofficial will list on @hitbtc!" This included a response from Defendant PELLEGRINO: "Impressive"

C. Postings to PALELLA's personal facebook page: "Happy to be in #London for the launch of @Helbizofficial $HBZ (4/26) in the exchange";

D. "Helbiz is now listed on its first exchange!";

E. "We are happy to partner with Anthony Diorio and his team listing Helbiz on Jaxx.io";

F. "Proud of my Helbiz team. I love the Jaxx.io integration. ExchangeS (sic) coming soon!" and a link to an article "Helbiz HBZ token integrated into Jaxx Multicurrency Digital Wallet";

G. "Helbiz is now live and listed on bonus exchange Mercatox with a Top 10 exchange listing coming soon!";

H. "It is now 1 month since Helbiz got listed, and today 30 days later Helbiz is traded on 11 exchanges and 26 markets globally. With product launch getting

Page 6

closer I am excited for the next couple of months! #HBZ #Helbiz #HelbizP2P #HelbizPay";

I. Also, @Helbizofficial tweeted in November of 2018: "We are working on listing one [of] Jaxx's large partner exchanges."

See id. ¶¶ 120. And plaintiffs constantly call themselves investors in the complaint (33 times) and describe the defendants' program as a "pump and dump" investment scheme:

This action is brought to obtain justice for approximately 20,000 small investors who were swindled in a crypto currency scam called HelbizCoin perpetrated by Defendants PALELLA and HELBIZ INC. ("HELBIZ"). The scam preyed mainly on small, unsophisticated investors, with the average investment being approximately $2,000. But by leveraging the exponential messaging capacity of social media worldwide, and by creating purposeful misimpressions about the size of the company and the popularity of the investment, Defendants were able to trick thousands of people and extract over $40 million dollars by an initial coin offering ("ICO") and by later dumping the coins on the secondary market.

Complaint ¶ 2. The token was an expected source of profit on resale, and its purchase was a classic "laying out of money in a way intended to secure income or profit from its employment." Howey, 328 U.S. at 298.

While Helbiz Coin was initially sold as both a method of paying transportation fare and an investment product, when Helbiz repeatedly delayed adopting the token as its exclusive payment method, it became increasingly clear that the token was in fact an investment. After promoting Helbiz Coin as the

Page 7

"native token for Helbiz transactions," the company stalled the integration of the token into its platform:

55. HELBIZ also changed its story about the role that the HelbizCoin would play. First, it announced plans to expand HelbizCoin's use case far beyond transportation to restaurants and online shopping and in point of sale terminals with retailers world wide. This was bunk, intended to soften the blow of the rest of the announcement.

56. Simultaneously with announcing these new ambitions for the coin, HELBIZ said that it had redesigned the platform so that it did not use HelbizCoin.

57. HELBIZ tried to justify the announcement with doubletalk to the effect that it was supposedly acting in the best interest of the coin holders by delaying its promise to make HelbizCoin the platform's currency because taking fiat currency instead of HelbizCoin would drive adoption of the platform and thereby (allegedly) increase the value of HelbizCoin when HELBIZ switched the platform over to HelbizCoin at a future date.

58. The company announced that the switch from fiat to HelbizCoin would now happen in a fourth phase of the development, Helbiz V4.0: "In the 4th phase Helbiz will utilize its user base, previous growth and position within local communities to phase out direct fiat payments in the Helbiz app moving towards a crypto only solution. All purchases, even with credit card, will simply purchase HBZ of the open market via the exchange API to fill the in-app wallet which will only hold HBZ making it the only accepted currency." (Compl. ¶s)

When Helbiz eventually began accepting the token, "it was in parallel with fiat prices, not exclusive as promised, and did not get much use as a result." Id. ¶ 66. Helbiz then abandoned the notion that the Helbiz Coin would

Page 8

be its exclusive payment method, while the token's value plummeted.

Speaking of Helbiz's planned destruction of the token, Helbiz engineer Carlos Beltran tweeted "I'm a lead engineer at HELBIZ and can say a thing or 2 about the matter - I integrated HBZ as a partner payment solution. We didn't see enough usage of HBZ @hbzcoin as trip payments, and therefore discontinued the partnership." Id. ¶ 115.

The economic reality is that buyers of Helbiz Coins in the ICO expected they would profit from the tokens' value rising along with demand as Helbiz used revenue from the ICO to grow its transportation platform and promote token use. The token's admittedly trivial use as a transportation fare was dwarfed by its promotion, purchase and use as an investment product, just as the buyers of tracts of land for citrus cultivation in Howey had "no desire to occupy the land or to develop it themselves; they are attracted solely by the prospects of a return on their investment." 328 U.S. at 300.

The Helbiz Coin is an investment in a common enterprise, from which the investor was led to expect profits primarily from defendants' entrepreneurial efforts. Its use as a fare for transportation was insignificant. "If that test be satisfied, it is immaterial whether the enterprise is speculative or non-

Page 9

speculative or whether there is a sale of property with or without intrinsic value." Id. at 301.

From any point of view, the Helbiz Coin is a security.

Kik concedes that its issuance of Kin through the TDE involved an investment of money by which participants purchased

[492 F.Supp.3d 178]

or acquired Ether and exchanged Ether for Kin. Thus, the parties agree that the first element of the Howey test is satisfied. The parties dispute whether the second and third elements are satisfied. I hold that that they are.

A. Common Enterprise

"A common enterprise within the meaning of Howey can be established by a showing of ‘horizontal commonality’: the tying of each individual investor's fortunes to the fortunes of the other investors by the pooling of assets, usually combined with the pro-rata distribution of profits." Revak, 18 F.3d at 87.⁵ Where horizontal commonality is present, "the fortunes of each investor depend upon the profitability of the enterprise as a whole." Id.

Kik established a common enterprise. Kik deposited the funds into a single bank account. Def. 56.1 Resp. ¶ 295. Kik used the funds for its operations, including the construction of the digital ecosystem it promoted. See infra Part II.B; Def. 56.1 Resp. ¶¶ 296-99. This ecosystem was crucial. The success of the ecosystem drove demand for Kin and thus dictated investors’ profits. Kik recognized and repeatedly emphasized this. Rather than receiving a pro-rata distribution of profits, which is not required for a finding of horizontal commonality, investors reaped their profits in the form of the increased value of Kin. See Balestra, 380 F. Supp. 3d at 354 ("[F]ormalized profit-sharing mechanism" in the form of pro-rate distribution "is not required for a finding of horizontal commonality.").

Kik, relying primarily on out-of-circuit authority, seeks to create additional requirements for a common enterprise. It is true, as Kik asserts, that in the Terms of Use Agreement, Kik expressly disclaimed any ongoing obligation to TDE purchasers after the distribution of their Kin. However, an ongoing contractual obligation is not a necessary requirement for a finding of a common enterprise. See Davis v. Rio Rancho Estates, Inc., 401 F. Supp. 1045, 1049-50 (S.D.N.Y. 1975) (considering contractual obligations among other representations, or lack thereof, in assessing common enterprise prong). For example, in Hart v. Pulte Homes of Michigan Corp., one of the cases on which Kik relies, the Sixth Circuit examined the economic realities of the transaction to determine if plaintiffs had alleged "a close relationship between the sale of model homes and the financing of common development" to establish a common enterprise. 735 F.2d 1001, 1005 (6th Cir. 1984). The contractual language is important to, but not dispositive of, the common enterprise inquiry, and courts regularly consider representations and behavior outside the contract. See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 352-55, 64 S.Ct. 120, 88 L.Ed. 88 (1943) (courts consider the "character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect," and may look "outside the

[492 F.Supp.3d 179]

instrument itself"). This is in line with the Howey test's "emphasis ... on economic reality." Tcherepnin , 389 U.S. at 336, 88 S.Ct. 548.

Similarly, the fact that TDE purchasers could sell their Kin whenever they pleased is not dispositive. With respect to horizontal commonality, the key feature is not that investors must reap their profits at the same time; it is that investors’ profits at any given time are tied to the success of the enterprise. This is not a scenario where the funds of each investor were segregated and separately managed, allowing for profits to remain independent. See Savino v. E. F. Hutton & Co., Inc., 507 F. Supp. 1225, 1236-37 (S.D.N.Y. 1981) (rejecting theory of horizontal commonality where "[t]he money invested in each ... account was not merged into a single investment fund," but instead, "[t]he profitability of each plaintiff's account was purely a function of the transactions executed on behalf of that account, and was not causally related to the profitability of the ... accounts as a whole").

The economic reality is that Kik, as it said it would, pooled proceeds from its sales of Kin in an effort to create an infrastructure for Kin, and thus boost the value of the investment. This is the nature of a common enterprise, to pool invested proceeds to increase the range of goods and services from which income and profits could be earned or, in the case of Kin, to increase the range of goods and services that holders of Kin would find beneficial to buy and sell with Kin. See Balestra, 380 F. Supp. 3d at 354 ("[T]he value of [the digital asset] was dictated by the success of the ... enterprise as a whole, thereby establishing horizontal commonality."). The stronger the ecosystem that Kik built, the greater the demand for Kin, and thus the greater the value of each purchaser's investment.

B. Expectation of Profits Based on the Efforts of Others

To qualify as an investment contract, the investment must come with "a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others." United Horn. Found., Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). Profits can take the form of "capital appreciation resulting from the development of the initial investment." Id. Howey contemplates that an investor is "led to expect profits solely from the efforts of the promoter or a third party." 328 U.S. at 298-99, 66 S.Ct. 1100 (emphasis added). However, the Second Circuit "ha[s] held that the word ‘solely’ should not be construed as a literal limitation; rather, we ‘consider whether, under all the circumstances, the scheme was being promoted primarily as an investment or as a means whereby participants could pool their own activities, their money and the promoter's contribution in a meaningful way.’ " United States v. Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (quoting SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir. 1982) ). I hold that TDE satisfies this element of the Howey test.

In public statements and at public events promoting Kin, Kik extolled Kin's profit-making potential. Kik's CEO explained the role of supply and demand in driving the value of Kin: Kik was offering only a limited supply of Kin, so as demand increased, the value of Kin would increase, and early purchasers would have the opportunity to earn a profit. See SEC Ex. 48-B, ECF No. 60-55, at 10:20-11:3. He explained, "If you could grow the demand for it, then the price -- the value of that cryptocurrency would go up, such that if you set some aside for yourself at the beginning, you could make a lot of money." SEC

[492 F.Supp.3d 180]

Ex. 49-B, ECF No. 60-58, at 36:7-10. In its white paper, Kik explained how Kin would be tradable on the secondary market through cryptocurrency exchanges. Kik Ex. K, ECF No. 64-11, at 8. Furthermore, after the first 24 hours of the TDE, Kik removed the cap on the amount of Kin investors could purchase, thereby allowing purchasers to buy more Kin to speculate on any increase in its value. Def. 56.1 Resp. ¶¶ 259, 261-62.

Kik characterized Kin also as a medium for consumptive use, "a general purpose cryptocurrency for use in everyday digital services such as chat, social media, and payments." Kik Ex. K, ECF No. 64-11, at 8; see also Kik Ex. H, ECF No. 64-8, at KIK000081. Kik argues that this consumptive use shows that its sale of Kin does not constitute an investment contract. See Forman, 421 U.S. at 852-53, 95 S.Ct. 2051 ("[W]hen a purchaser is motivated by a desire to use or consume the item purchased[,] ... the securities laws do not apply."). However, none of this "consumptive use" was available at the time of the distribution. It would materialize only if the enterprise advertised by Kik turned out to be successful. By contrast, in Forman, cited by Kik, "there [could] be no doubt that investors were attracted solely by the prospect of acquiring a place to live, and not by financial returns on their investments." 421 U.S. at 853, 95 S.Ct. 2051.

The demand for Kin, and thus the value of the investment, would not grow on its own. Growth would rely heavily on Kik's entrepreneurial and managerial efforts. In its white paper, Kik promised to "provide startup resources, technology, and a covenant to integrate with the Kin cryptocurrency and brand." Kik Ex. K, ECF No. 64-11, at 21. In the white paper and elsewhere, Kik further described efforts it would take to integrate Kin into Kik Messenger, create incentives to attract developers who would establish new uses for Kin, and generally "foster an ecosystem" rooted in Kin by "creat[ing] a series of new products, services, and systems." Id. at 5-6, 21. Kik's insistence in its briefs that "market forces" would drive the value of Kin ignores the essential role of Kik in establishing the market. Moreover, as Kik's CEO explained, Kik had a unique incentive to increase demand for Kin because it retained for itself 30% of the tokens created. See SEC Ex. 46-B, ECF No. 60-49, at 35:17-36:7 ("I think what we can guarantee is we are all in on this .... [T]his is something that is in our financial best interest, because of the 30%, but actually, like, just to be honest, like, this is something we have to do.").

These efforts by Kik were crucial because without the promised digital ecosystem, Kin would be worthless. This point draws attention to why Kik's reliance on case law from the real estate context is misplaced. See, e.g., Forman, 421 U.S. at 852-53, 95 S.Ct. 2051 (holding that homebuyers in a cooperative housing project were not parties to an investment contract where buyers "were attracted solely by the prospect of acquiring a place to live, and not by financial returns on their investments"); Davis, 401 F. Supp. at 1049-51 (holding there was not an investment contract where plaintiff purchased land in a residential subdivision with the mere hope of increase in value based on development of the neighborhood). Unlike real estate, Kin have no inherent value and will generate no profit absent an ecosystem that drives demand. See Bender v. Cont'l Towers Ltd. P'ship , 632 F. Supp. 497, 501 (S.D.N.Y. 1986) (contrasting sale of condominiums with contexts where, "without the efforts of the promoters, the investments would be virtually worthless"). It is undisputed that Kik had to be the primary driver of that ecosystem.