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SEC Files Lawsuit to Halt Token Distribution to Investors Who Purchased During Closed Offerings

I nvestors bought the future gram tokens during two closed rounds in February and March of 2018 for a price of 37 cents and $1.33 each, respectively. In early September, the code for TON’s blockchain nodes was released and on Oct. 2, investors received emails with links to TON’s key generator (so that they can access their actual tokens). The project is scheduled to launch no later than Oct. 31. (CoinDesk.com)

The Securities and Exchange Commission reached out to TON Blockchain investors (Telegram’s blockchain-based division) for comment regarding pitches and conveyance of information regarding their investments in ‘grams,’ the moniker for the token issued by TON Blockchain.

After one conversation, the SEC determined the investor purchased:

“$27.5 million worth of Grams in early 2018 for tokens that had no use and would have no use at the time of launch, demonstrating its intent to profit from the potential increase in value of Grams.” (CoinDesk.com)

The SEC has long shown a position of skepticism in token offerings that offer no readily apparent functionality or necessity.

Telegram Solicited Feedback from SEC Prior to Lawsuit

In a circulating email, presumably to ‘Gram’ investors in response to the SEC's actions, Telegram claims surprise and disappointment,

“Telegram has attempted to engage with and solicit feedback from the SEC for the past 18 months regarding the TON blockchain. We were surprised and disappointed that the SEC chose to file the lawsuit under these circumstances, and we disagree with the SEC’s legal position.”

The email, according to Coindesk, goes on to say Telegram is exploring their options “including but not limited to assessing whether to seek to delay the launch date.”

TON Blockchain

Lacking a Use Case

use case — a specific situation in which a product or service could potentially be used. (Google Dictionary)

According to the Securities and Exchange Commission, TON Blockchain, and by extension, Telegram, is peddling a token that lacks a use-case and whose value is purely speculative. As mentioned previously, ‘Grams … had no use and would have no use at the time of launch, demonstrating its intent to profit from the potential increase in value of Grams.’

In short, the SEC asserts that ‘Grams’ are inessential and provide no use case of substance at this point.

Why Does the SEC have any say in this at all? Are we not talking about a ‘crypto’ currency and not a security?

The SEC often uses what is widely known as the “Howey Test,” resulting from SEC v. W. J. Howey Co. in determining whether or not a qualification as an ‘investment contract’ is appropriate,

“a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

In the case of ‘Grams,’ the SEC felt this distinction appropriate.

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