• Michael Bacina

Telegram's USD$1.7 Billion token sale targeted by SEC with throwdown on token categorisation



The US Securities & Exchanges Commission has filed a lawsuit in New York state against two offshore entities which operated the Telegram Initial Coin Offering in January 2018, in which 2.9 Billion Grams were offered for sale, with Telegram receiving approximately US$1.7 billion.


Readers will recall our news on the Crypto Rating Council which Coinbase helped set up. Coinbase Custody had recently announced support for GRMs, but at the date of publishing GRMs were not listed on the supported assets of Coinbase Custody. That decision is now being criticised.


The Telegram pre-sale documents have a 31 October 2019 delivery date for Grams as hard deadline with a termination trigger, requiring Telegram to return in USD the funds taken under those agreements if Grams are not delivered by that date.


Telegram was an interesting sale in that it utilised the "Reg D" framework to offer the purchase contract for Grams as an the offer of securities (which could be made only to accredited investors). That was done and Telegram was lauded for attempting to make a compliant offering at the time, and this was of course in the context of the SAFT project seeking to draw a conceptual line between the offer to purchase cryptographic tokens, and the tokens themselves.


However, in their complaint, the SEC has dramatically attacked this position saying:

Telegram has taken the position that the Gram Purchase Agreements were investment contracts, i.e., securities, and placed a restrictive legend on the Gram Purchase Agreements.

and

Telegram, however, claimed that Grams, the heart of the Gram Purchase Agreements, without which the agreements have no value or purpose, were not securities but rather currency.

The SEC goes on to allege that the Grams themselves are the unregistered security being sold by Telegram, alleging:

Grams are investment contracts. Based on Telegram’s own promotional materials and other acts, a reasonable purchaser of Grams would view their investment as sharing a common interest with other purchasers of Grams as well as sharing a common interest with Defendants in profiting from the success of Grams. The fortunes of each Gram purchaser were tied to one another and to the success of the overall venture, including the development of a TON “ecosystem,” integration with Messenger, and implementation of the new TON Blockchain. Investors’ profits were also tied to Telegram’s profits based on Telegram’s significant holdings of Grams

The SEC complaint goes on to seek to differentiate Grams from other "utility" tokens which would be expected to have a use on delivery, claiming that the size of Gram purchases by certain small numbers of investors would far exceed the amount needed to access or have "utility" within the TON ecosystem, and straight up alleging that the Grams would have no "utility" or use upon launch other than speculation.


Much of the complaint documents the marketing efforts Telegram undertook and promise support for the price of tokens as justification for the Grams themselves being considered securities.


Many are speculating whether this lawsuit will simply result in a fine being paid by Telegram, such as in the EOS SEC case, or whether this will turn into a Kik v SEC style longer running lawsuit. It is worth noting that Australia, the UK, Singapore and Switzerland have never made a distinction between the offer of a token being a security but the token not being a security, these jurisdictions have always approached matters holistically, which is a far more sensible way to go (but in fairness the US is stuck with their Howey test which creates the strange distinction). Other than Australia, these leading jurisdictions have sensibly exempted so-called "utility" tokens from being considered securities since they have no entitlements to returns etc, and ultimately are little more than digital trading cards with greater functionality than a mere collectible.


This lawsuit will be one to watch closely, but ultimately shows why sensible legislative framework, such as that adopted by the UK, Switzerland and Singapore, is so important for ensuring a compliant path forward for cryptocurrencies.

© Michael Bacina. All rights reserved

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