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Kik Interactive is shutting down its messaging app and laying off much of its staff.

Deborah Baic/The Globe and Mail

Canadian technology startup Kik Interactive Inc. is shutting down its messaging app and laying off most of its staff as it looks to deploy its remaining resources on defending itself in a legal battle with the U.S. Securities and Exchange Commission over its cryptocurrency venture.

More than 100 employees will be affected as the company pares down to just 19 staff and shifts its focus to getting users to buy its digital currency, Kin.

“Together these changes will drop our burn rate [spending in excess of income] by 85 per cent, putting us in position to get through the SEC trial with the resources we have,” Kik’s founder and chief executive officer Ted Livingston said in a post on Medium.

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As regulators around the world grapple with how to address new fundraising methods facilitated by virtual currencies, Kik has found itself in the crosshairs of the SEC. The U.S. regulator sued the Waterloo, Ont.-based company in June for allegedly conducting an illegal securities offering when it raised US$100-million by selling its Kin token in 2017. A total of US$55-million was raised from American investors through the token sale, according to the SEC.

In court documents, the SEC alleges that Kik’s decision to issue tokens was motivated by financial troubles.

“Despite Kik Messenger’s initial success and the company’s receipt of venture capital funding, Kik’s costs have always far outpaced its revenues, and the company has never been profitable,” the SEC alleges in a complaint filed with the United States District Court for the Southern District of New York.

In late 2016 and early 2017, the number of people using Kik Messenger waned and the company, which had insignificant revenue, expected it would run out of cash to fund its operations, according to the SEC. It hired an investment bank to try to sell itself to a larger company, but no buyers emerged.

“Faced with a shrinking financial ‘runway,’ Kik decided to ‘pivot’ to an entirely different business and attempt what a board member called a ‘Hail Mary pass:’ Kik would offer and sell one trillion digital tokens in return for cash to fund company operations and a speculative new venture,” the SEC alleges.

Kik did not immediately respond to a request for comment.

At the time of the sale, Kik said it planned to integrate the token into its messaging app and use the money it raised to build a new ecosystem of digital services.

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Currently, there are more than two million people earning Kin and 600,000 spending it every month, Mr. Livingston said on Medium. Users can earn Kin by participating in activities such as polls and quizzes.

“While losing Kik will have a big impact on these numbers, the continued growth of the Kin ecosystem has more than made up for it,” he said. There are dozens of apps that accept the currency including a dating app called Matchmaker, a social platform called GoChallenge.me and a decision-making application called Swelly.

Fred Wilson, a partner at Union Square Ventures, one of Kik’s investors, described the move to shutter the Kik messaging app as a hard decision. Although its popularity has waned because of competition from rivals such as iMessage, WhatsApp and Facebook Messenger, Mr. Wilson said in a blog post that the app still has almost five million daily users.

“But it has never been a profitable business in a market full of free competitors,” he added. “The decision to shut Kik and scale back to a small core developer team is all about continuing to support the Kin cryptocurrency.”

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