A U.S. judge has refused to apply the Telegram reasoning—which would significantly widen the applicability of the Howey test for whether a coin offering constitutes a security or not—to the ongoing Kik litigation.
A number of cases are making their way through the U.S. courts at the moment concerning the alleged offering of unregistered securities in the form of digital assets. The cases typically involve the creation and offering of the rights to digital tokens to investors in return for capital, and the question is whether or not this offering counts as a security for the purposes of the U.S. Securities and Exchange Commission’s (SEC) rigorous framework governing the offering of securities.
That question got a significant amount of judicial attention back in May, when the Court granted a preliminary injunction against Telegram and their Gram token on the basis that the SEC had shown a substantial likelihood of success in their lawsuit alleging that the Gram offering was an unregistered security.
The ruling was largely taken as a sign that the Courts would align with SEC’s analysis of the issue: that the Court would look beyond just the tokens themselves in assessing whether a security is being offered and would consider the entire offering process—from the investment agreement through to the eventual distribution of the developed tokens—as a part of the same scheme, which taken as a whole falls within the definition of security.
The SEC certainly thought so, anyway: almost immediately after the Telegram ruling, the SEC filed for summary judgment in its lawsuit against Kik. Despite the Telegram case not being an authoritative precedent—the Judge in that case was only ruling on a preliminary matter and only needed to consider whether there was a substantial likelihood of success—the SEC thought that they could convince the Judge in the Kik litigation to adopt the same reasoning and resolve the suit in their favor.
In a hearing regarding the SEC’s motion for summary judgment last week, however, Judge Hellerstein made it clear he did not find himself bound by the Telegram case, noting that as that ruling was in response to an application for a preliminary injunction against Telegram, the Judge only had to find a substantial likelihood of success and was not providing a ruling on the case itself: “I think that there is no binding precedent on me one way or another,” he said.
Telegram and Kik offered similar arrangements in the creation and sale of their digital tokens: both used the Simple Agreement for Future Tokens (SAFT) structure to raise capital for the development of their tokens, had yet to develop the systems underpinning the tokens at the time of the ICO, with the increase in value and subsequent profits intended to be brought about by each company’s continued work on the technology.
The comparison between the two invites itself, but what could have been a definitive ruling in the Telegram case was neutered by Telegram abandoning its Gram token entirely and avoiding what seemed at that point like an inevitable judicial death blow to the SAFT model.
Still, the Kik litigation offers the best chance for an authoritative judicial decision on the state of digital asset ICOs and the SAFT model, despite the Judge not considering himself bound to the reasoning accepted in the Telegram case. Judge Hellerstein has yet to issue a final ruling on the application for summary judgment, but without a binding precedent and the relatively novel questions of law at issue, it seems unlikely that this case is headed anywhere but trial.
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