Telegram's ongoing battle with the US Securities and Exchange Commission (SEC) has just reached a tipping point, and this was not good news for the social messaging platform. After being accused of offering an unregistered security using digital currency, Gram Telegram began to resist, but in February the SEC stated that it had evidence that the company was violating the rules for securities. Now it may seem that the judge agreed.
Telegram received a preliminary injunction from a federal judge who ordered a halt to the sale of the Gram token. U.S. District Judge P. Kevin Castel, who heard arguments in the case, determined that, at first glance, Telegram's scheme over Gram's proposal to create the Telegram Open Network (TON) blockchain may violate SEC recommendations explaining: "[Given the economic realities according to Howey's criterion, the Court considers that, in the context of this scheme, the resale of Gram in the secondary public market would be an integral part of the sale of securities without the necessary registration statement.”
Castel added that using the Howie test was part of the process for any type of investment proposal and that “prudent buyers would not want to pay $ 1,7 billion to purchase grams simply as a means of storing or transferring value. Instead, Telegram devised a scheme to maximize the amount that initial buyers are willing to pay Telegram, creating a structure that allows these buyers to maximize the value they receive from reselling in public markets. ”
One of the problems is related to the way Telegram offered Gram. They have been made available under the Simple Agreement for Future Tokens (SAFT) agreement, which is governed by the securities rules. SAFT is investment contracts and an established type of security, but Telegram tried to argue that the included asset, Gram, would end up being used on an established network and would not constitute a type of security.
This paradox forces the judge to weigh in favor of securities laws rather than Telegram claims, and Castel added in his decision: “The court considers that the SEC has shown a significant likelihood of success in proving that Gram purchase agreements, Telegram’s implied obligations, and its arrangements with the original purchasers, including the intended and expected resale of the grams to the public market, are tantamount to distributing securities, which requires compliance with section 5. Telegram could not establish an exception to the requirement registration in accordance with section 4 (a) (2) or Rule 506 (c). In addition, the Court concludes that the SEC has shown that the sale and imminent supply of Gram constitutes the only continuing violation of Section 5. The Court also considers that delivering Gram to original buyers who would resell them to the open market poses an almost certain risk of future harm , namely the completion of the public distribution of a security without a registration application. A rule prohibiting the delivery of grams to original customers and thereby preventing the culmination of this ongoing violation is appropriate and will be provided. ”
This decision does not bring the case to a conclusion - it is only a preliminary decision that will pave the way for more disclosure and reinstatement in court. However, this decision almost certainly precedes what is to be expected from an ongoing lawsuit, and could have implications for other, similar cases such as Kik and its digital currency Kin.