Telegram’s ongoing battle with the U.S. Securities and Exchange Commission (SEC) just reached a turning point, and it wasn’t good news for the social messaging platform. After having been accused of offering an unregistered security with its Gram digital currency, Telegram began to fight back, but in February, the SEC asserted that it had evidence that the company was violating securities regulations. It now would seem that a judge has agreed.
Telegram has been given a preliminary injunction by a federal judge, ordering it to stop selling the Gram token. U.S. District Judge P. Kevin Castel, who has been listening to arguments in the case, has determined that, at first appearance, Telegram’s scheme to offer Grams in order to build the Telegram Open Network (TON) blockchain might be in violation of SEC guidelines, explaining, “[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.”
Castel added that using the Howey Test was part of the process for any type of investment offering and 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.”
One of the issues comes in with how Telegram offered the Grams. They were made available through a Simple Agreement for Future Tokens (SAFT) contract, which is defined by securities regulations. SAFTs are investment contracts and an established type of security, but Telegram had tried to argue that the included asset, the Gram, would be, eventually, for use on an established network and were not a type of security.
That paradox has the judge weighing in favor of securities laws, not Telegram’s assertions, and Castel added in his ruling, “The Court finds that the SEC has shown a substantial likelihood of success in proving that the Gram Purchase Agreements, Telegram’s implied undertakings, and its understandings with the Initial Purchasers, including the intended and expected resale of Grams into a public market, amount to the distribution of securities, thereby requiring compliance with section 5. Telegram has failed to establish an exemption to the registration requirement under either section 4(a)(2) or Rule 506(c). Further, the Court concludes that the SEC has shown that the sale and imminent delivery of Grams represent a single ongoing violation of section 5. The Court also finds that the delivery of Grams to the Initial Purchasers, who would resell them into the public market, represents a near certain risk of a future harm, namely the completion of a public distribution of a security without a registration statement. An injunction, prohibiting the delivery of Grams to the Initial Purchasers and thereby preventing the culmination of this ongoing violation, is appropriate and will be granted.”
This decision doesn’t bring the case to a close—it is just a preliminary ruling that will pave the way toward more discovery and redress in court. However, the ruling is almost certainly a precursor of what to expect out of the ongoing litigation, and could also have ramifications for other, similar cases, such as that of Kik and its Kin digital currency.
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