Telegram Prohibited from Issuing Gram Tokens as US Court Grants SEC's Injunction

A United States District Court has sided with the US Securities and Exchange Commission (SEC) granting an injunction against Telegram to to temporarily prevent the company from issuing its Gram tokens.

Gram is a security according to Howey Test

The cryptocurrency and blockchain community have been closely watching the court case between the SEC and Telegram over the legal status of the latter’s $1.7 billion token offerings. The SEC has maintained throughout that the tokens sold were unregistered securities and today a US district court has sided with the regulator.

In a March 24 filing, the Court granted the SEC’s motion for a preliminary injunction to halt the sale of Gram tokens.

As per the Court’s filing, “The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts. 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.”

The story continues

The saga began when a suit was brought against Telegram last October from the SEC, as the regulator believes that Telegram violated the Securities Act with its 2018 token offering by not adhering to the registration requirements.

According to the SEC, citing the Securities Act of 1933, Telegram and TON failed to register their sale of Gram tokens, and the SEC considers the sale to be “unlawful.” The SEC’s complaint reads, “Telegram committed to delivering Grams to the Initial Purchasers in conjunction with the launch of the TON Blockchain by no later than Oct. 31, 2019, and it plans to sell millions of additional Grams at the same time.”

Telegram has maintained its stance that the ICO was authorized to sell to accredited investors since the company had filed a Form D 506(c) Notice of Exempt Offering of Securities prior to the first round of its offering. The court has disqualified this argument in the recent injunction filing, which read, “Telegram’s sale of Grams to the Initial purchasers, who will, function as statutory underwriters, is the first step in an ongoing public distribution of securities and, as such, Telegram cannot receive the benefit of an exemption from the registration requirement under either section 4(a) of Rule 506 (c)."

The SEC’s Howey Test

As investment continues to increase in the cryptocurrency space has grown, the SEC has become increasingly interested in defining cryptocurrencies.

If the SEC is able to determine that a particular cryptocurrency token is classified as a security, that brings about a host of implications for that cryptocurrency. Effectively, it means the SEC can determine whether or not the token can be sold to US investors legally or not; it also compels US investors to register their token holdings with the SEC.

When applying the Howey Test, the question to ask, in this case, is whether or not Gram’s investors were participating in a speculative enterprise, and if so, if the profits those investors believe they will receive are entirely dependent upon the work of Telegram.

On Feb. 18, Telegram’s lawyer, Alexander Drylewski had criticized the application of the SEC’s Howey Test, citing that a test designed to categorize securities does not apply to digital assets that are offered with a promise of managerial oversight, that will increase their value over time. The lawyer argued that when TON blockchain launches, Grams will not be securities but commodities.

The injunction filing also indirectly countered Drylewski’s stance—rejecting Telegram’s argument that Gram should not fall under the SEC’s jurisdiction as it would soon become a commodity, the Court stated, “The Court rejects Telegram’s characterization of the purported security, in this case. While helpful as a shorthand reference, the security, in this case, is not simply the Gram, which is little more than alphanumeric cryptographic sequence. Howey refers to an investment contract…that consists of the full sets of contracts, expectations, and understandings centered on the sales and distribution of the Gram. Howey requires and examination of the entirety of the parties’ understanding and expectations.”