Global messaging giant Telegram has been involved in a legal battle with the Securities and Exchange Commission (SEC) regarding its $1.7 billion sale of Gram tokens for more than a year. The case has taken a fresh turn as a Federal Judge in New York has issued a preliminary injunction on March 24, ruling that the distribution of the said tokens would be a violation of the securities laws.
The much-anticipated launch of Telegram’s TON blockchain was delayed after the SEC obtained a temporary injunction after Telegram was accused of conducting an illegal sale of their initial ‘Gram’ token offerings. U.S. District Judge P. Kevin Castel of the Southern District of New York agreed that the SEC demonstrated a plausible case that Telegram sold unregistered securities in breach of U.S. securities law. The filing notes:
“The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts.”
Upon application of the Howey-Test, created by the U.S. Supreme Court in 1946 to determine whether certain transactions qualify as investment contracts and hence subject to securities law, the court believes that “reasonable purchasers would not be willing to pay $1.7 billion to acquire Grams merely as a means of storing or transferring value. Instead, Telegram developed a scheme to maximize the amount initial purchasers would be willing to pay Telegram by creating a structure to allow these purchasers to maximize the value they receive upon resale in the public markets.”
The court has hence ruled that “considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.”
What happens to TON?
As of now, this is a vital point in the case as a preliminary injunction, however not final, suggests that the court could likely enter a permanent injunction as well. Although the appellate review is possible, at this particular juncture, it can generally only be taken by permission, which isn’t much likely to happen in Telegram’s case.
Investors of the Telegram Open Network (TON) project had to agree not to demand their money back after a majority of the investors decided to wait for the launch of the blockchain platform until April 2020. However, the investors are eligible for a total refund if Telegram fails to deliver.
The battle between SEC and Telegram continues as Telegram, on its part, has continued to refuse all allegations made by the SEC. The company had previously claimed that “if and when” Gram tokens launch, “they will constitute a currency and/or commodity – not securities under the federal securities laws.” It is yet to be seen how it fares for TON.