Telegram was dealt a blow last week in its fight with the US Securities and Exchange Commission (SEC) when a judge hearing the case determined that its Gram digital currency could be viewed as a security. As such, the court ordered Telegram to stop selling Grams entirely until a final ruling is handed down. Telegram has already indicated that it would fight the ruling, but is now taking a different tactic. It wants Judge Kevin Castel, who dropped the hammer last week, to acknowledge that the ruling only impacts US-based potential investors.
On Friday, Telegram’s lawyers asserted that the judge’s decision was not completely valid, as Telegram’s US investor base was only a small portion of the entire group. Only 30% of the investors came from the US, with the other 70% who signed purchase agreements were all outside the country. As such, the lawyers assert that the SEC does not have oversight authority, making the entire court exercise irrelevant.
They still want the judge to weigh in, however, in order to cover their bases. The lawyers explained, “Defendants respectfully seek clarity with respect to the scope of the injunction, see Fed. R. Civ. P. 65(d); in particular, that the Order does not apply to Defendants’ Purchase Agreements entered into abroad with non-U.S. Private Placement investors not subject to U.S. securities laws.”
The SEC vs. Telegram fight is just the latest in a long list of interactions by the financial agency against companies operating in the digital currency space. It’s also an example of the agency’s broad misuse of authority, as, to date, there has still not been any clear, concise definition of what constitutes a security with respect to the Bitcoin ecosystem.
A lawyer who focuses on securities and technology, Josh Lawler, has authored a well-crafted op-ed to show how the SEC and the courts are wrong in their management of digital currency offerings. He asserts that the court “stitched together disparate securities law concepts” in order to reach “a scrambled, incorrect conclusion” to support the SEC’s hypothesis.
Lawler explains, “Whether a gram is a security depends on whether it is an investment contract. Per the now infamous Howey Test, an ‘investment contract’ is ‘a contract . . . whereby a person invests . . . in a common enterprise and is led to expect profits. . . from the efforts of . . . a third party.’ The analysis turns on the ‘expectation’ of the purchaser and is unique in securities regulation in being a subjective test. In this case, the court weighed carefully the subjective intent of the Initial Purchasers, but not of the third-parties to whom the Initial Purchasers would (if not enjoined) sell the grams following delivery by Telegram. To do so would be impossible; they do not yet exist.”
To that extent, the court has not produced evidence to show that the Grams don’t have a use case, making the ruling immaterial. Lawler adds, “It is flat out wrong for the court to conduct the Howey analysis based only on the forward contract and then to extrapolate their result to the grams.”
The result of the court’s ruling is yet another blow for blockchain innovation in the US. The country is already lagging behind many others who have, at the very least, recognized the legitimacy of the blockchain and who have established rules to oversee the space. Now, it can only fall further behind.
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