Telegram spots legal ‘lifeline’ precedent in SEC securities case

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Messaging app Telegram has raised a recent court ruling in the United States as a potential lifeline in a legal case brought by the U.S. Securities and Exchange Commission (SEC), which could help the firm argue it had not violated federal securities laws.

In a submission before a U.S. court dated March 6, Telegram said a recent case undermined the arguments supporting the SEC’s injunction, which prevents the firm from issuing any further tokens for investment.

Telegram is being sued by the U.S. regulator over its $1.7 billion ICO for its Telegram Open Network, which saw the wholesale issue of its proprietary tokens in 2018.

Despite submitting a Notice of Exempt Offering of Securities with the SEC, which Telegram argues provides an opt-out on the basis of offering only to accredited investors, the SEC nevertheless began investigating the firm over whether its tokens would allow investors to resell to public investors.

The regulator alleges that the structure of the ICO incentivizes the secondary market, which it says makes the offer illegal. As a result, the regulator issued a temporary order halting the offer, to prevent further tokens from being issued.

Highlighting a recent case involving a non-crypto firm, Siry Investment, Telegram says a March 3 ruling supports its position against the SEC, pointing to similar language in a contested partnership agreement within that case:

“As in Siry, these [Gram] provisions demonstrate that the economic reality of the private placement was not to distribute securities to the public in violation of the U.S. securities laws.

“The purchase agreements contained express provisions reflecting that (i) performance of the purchase agreement may not ‘violate any judgment, statute, rule or regulation applicable to it’ or ‘contravene any law, regulation or regulatory policy applicable to the purchase; and (ii) each purchaser warranted that it can only sell Grams ‘in accordance with applicable securities laws and the terms of this purchase agreement.’”

The SEC has dismissed the arguments and distinguished the precedent from the case at hand. In a letter dated March 9, the SEC said the argument “continues Defendants’ erroneous and ultimately fatal reliance on labels over substance,” and is one of a series of “persistent attempts to obscure the actual economic reality and terms of the transactions at issue in this case by pointing to legalese statements.”