The on-going battle between telegram and the SEC over their 2.9 billion gram token sales that raised a massive $1.7 billion has been raging since last year. The U.S Securities and Exchange Commission [SEC] had obtained a temporary injunction after Telegram was accused of conducting an illegal sale of their initial ‘Gram’ token offerings
The SEC and Telegram were supposed to see each other in court back in October 2019, but the hearing was postponed to February 18th and 19th, 2020. Both the parties finally went head to head on February 19th with Judge P. Kevin Castel of the U.S District Court for the Southern District of New York presiding over the case.
SEC stressed over the Securities Act
Castel started off noting that both the parties should focus on the “economic realities” of the token sale, adding that “disclaimers” have no control over how the court views the asset. He raised various concerns like whether the gram tokens sold in the first round had utility if the TON blockchain would be able to operate at launch and what would happen if Telegram’s executives fled to the British Virgin Islands, where Telegram is currently domiciled.
Telegram’s attorney pointed towards the TON’s testnet blockchain which already has 36 validators, assuring the judge that the blockchain had garnered sufficient interest from the “decentralized community.”
In contrast, the SEC stressed on the fact that Telegram violated Section 5 of the Securities Act of 1933 by failing to register the token sales to accredited investors as securities. It also stressed on the fact that the company did not restrict initial gram purchasers from reselling grams on a secondary market. SEC senior trial attorney Jorge Tenreiro noted:
“We submit that this is the next step in a public offering in violation of Section 5 of the Securities Act.”
Tenreiro continued to argue that the gram tokens were sold with no utility for the investors, and could only be speculated upon by investors who had no other interest in crypto. He referred to investor memos that made claims of returns in the double and triple digits, calling the transaction a “straightforward capital raise.”
When the judge pointed out that Telegram did include a restriction on reselling grams pre-launch in its purchase agreements with investors, Tenreiro argued that the company was taking investors at their word instead of ensuring no resale. Tenreiro urged the court to join the SEC in stopping an “ongoing violation of Section 5 of the Securities Act.”
Telegram attorney’s fightback
Alexander Drylewski, Telegram’s attorney, argued that the SEC’s Howey Test, a framework for investment contracts and analysis of digital assets, does not apply to digital assets unless they are offered with managerial oversight that will increase their value with time. If this is the case, it means that upon launch of the TON blockchain, gram tokens will no longer be securities, Drylewski told the court.
He further added that the Reg D exemption should apply for the global messaging giant’s case because the company had investors agree to confirm with the company they had not sold grams on a secondary market before the launch of the TON blockchain.
He concluded that Telegram shouldn’t be held responsible for investors who violated terms of agreements by making secondary market deals without the company’s knowledge.
Time is against TON
After the two hour hearing, Castel decided to reserve judgment for the SEC’s case for a preliminary injunction regarding Telegram’s 2019 Gram sale. He extended the restraining order that prohibits the sale of Gram tokens but assured the accused party that a judgment would be made prior to April 30.
Investors of the Telegram Open Network (TON) project had to agree to not demand their money back, after a majority of them decided to wait for the launch of the blockchain platform until April 2020. Following SEC’s restraining order that froze the blockchain project in its tracks.
If the blockchain fails to launch by April 30th, Telegram would be liable to refund all the investor funds according to a clause in the gram purchase agreement. The fate of TON is now in the hands of the court. However, if Telegram manages to win, that would provide much-needed clarity over how ICO sales should function, and would definitely get the SEC off the backs of many crypto projects.