Telegram’s ongoing saga with the U.S. Securities and Exchange Commission isn’t ending anytime soon. After the regulatory body swooped in with a last minute restraining order, Telegram has been embroiled in an increasingly strenuous legal battle to get the Telegram Online Network (TON) over the line. The blistering pace at which the latest developments have occured shows no sign of slowing, with the court hearing pushed back to February 2020 and investors voting against a refund of up to 77% of their initial investment.

Since the hammer of the SEC came down on Oct. 16, the rights of TON investors have taken center stage. While Telegram followed the SEC’s ban with a forthright legal challenge, what might happen to investors from the company’s $1.7 billion private sales round created heated discussion. A leaked copy of the sales contract signed by investors revealed a “force majeure,” a clause that indicated the firm might not be obliged to refund investors in the event of regulatory changes.

As previously reported by Cointelegraph, legal opinion was divided over what this clause could mean for investors’ funds, with some arguing that accredited investors should be able to mitigate risk prior to investment. Others indicated that Pavel and Nikolai Durov — the brothers behind Telegram and TON — may have to pay out from their own personal funds.

Investors vote on refund

Now, investors voted against the return of their funds according to two sources close to the Telegram team. Investors initially had until Oct. 23 to decide whether or not they would demand a 77% refund of their investment. Investors from both rounds of the offering voted for a postponement of the TON network until April 30, while maintaining their initial investment in the project.

Related: TON’s ‘Force Majeure’ Clause — Is Telegram About to Refund Investors?

Although this brazen display of confidence from investors indicates that there is still momentum behind the project, Gary Murphy of the New York-based legal practice Debevoise & Plimpton, told Cointelegraph that he sees nothing from the SEC that signals a reversal of its original view:

“At this time there is nothing from the SEC to indicate that a green light — basically reversing the initial view expressed in the injunction filing — is necessarily likely.”

Cautiously optimistic

Telegram’s court appearance in New York has been postponed until late February 2020, as both the firm and the SEC explore the complexities of the case and whether there is one. In a letter to investors published on Oct. 19, Telegram said that the rescheduling of recent hearings until Feb. 18–19, 2020 is a positive step toward its regulatory issues being resolved:

“Telegram views this development as a positive step towards resolving this matter through the court system in an expeditious manner, and we and our advisers will be using the time to ensure that Telegram’s position is presented and supported as strongly as possible at the February hearing.”

Telegram’s regulatory woes began after the SEC announced that it would classify the Gram token (the native currency of TON) as a security. The crux of the issue lies in the fact that Telegram filed for a “Form D” in February 2018, an exception that releases the applicant from registering their token as a security with the SEC.

Applicants that take the Form D route do not, however, have free rein to do exactly as they please. Telegram is restricted to selling Gram tokens only to accredited investors. This particular nuance of the application route proved to be the downfall for the TON launch.

Investors in the two private rounds of sales in February 2018 may well have been accredited, but no restrictions were put in place to prevent them from subsequently reselling their newly acquired tokens to investors that do not meet the same SEC requirements.

An example of this occurred in July, when South Korean custodian Gram Asia, unaffiliated to TON itself, began selling rights to its Gram holdings on Japanese cryptocurrency exchange Liquid at $4.00 per token, almost tripling the original $1.33 sale price in the private sales round.

In its letter to investors, Telegram hammered home its belief that the SEC is mistaken in its classification of Grams as securities. The firm said that it expected the postponement of the court hearing to allow for more time to argue its case for the classification of Grams:

“In the February hearing Telegram anticipates asking the court to rule on the core argument that Grams are not securities. The October 24 hearing, in contrast, was only to consider whether a delay should have been mandated, without conclusively resolving the core argument.”

Avichal Garg, entrepreneur and co-founder of Electric Capital, told Cointelegraph that the delay will give the SEC and TON time to negotiate, and that he expects an out-of-court settlement to be the most likely outcome: “The second most likely outcome is that TON launches outside of the US and returns money to its US based investors.”

As internet attorney and cybersecurity law professor Andrew Rossow told Cointelegraph, the SEC has made its position clear, and companies that don’t comply with regulations can expect to face the consequences:

“If you are in the digital money space or regularly dealing with securities, you need to get one thing straight — the SEC isn’t playing around.”

In Rossow’s opinion, the SEC has now made it clear that most tokens offered by companies qualify as securities and therefore must be in compliance with regulations. However, most companies fail to understand both what type of product they are offering as well as the effect that will come from it. He went on to add:

“It’s time these companies recognize this is not a game. You don’t mess with people’s hard-earned money or investments. I don’t care if you are Telegram or Facebook. What we are starting to see is the SEC, Congress, and other lawmakers begin to hold Silicon Valley and tech giants accountable for their actions.”

Court delays

According to a court order shared with Cointelegraph on Oct. 19, Telegram’s hearing with the SEC in New York is due to take place in early 2020, on Feb. 18–19. The court order prevents the sale of any tokens until the conclusion of the hearing:

“IT IS ORDERED that Defendants shall not offer, sell, deliver, or distribute ‘Grams’ to any person or entity, until the conclusion of the hearing scheduled by the Court.”

In addition to its claim that Telegram violated U.S. securities laws during its two sales rounds, the SEC is attempting to put in place a preliminary injunction to prevent the company from committing further violations. Debevoise & Plimpton’s Murphy outlined his take on the significance of the delay to Cointelegraph:

“My sense is that the judge in the case determined that there are novel and complex issues to be resolved in the case, and that delaying the hearing would provide the parties more time to prepare. It would also ultimately give the court more time to consider the SEC’s initial filing and Telegram’s response.”

Murphy also suggested that Telegram and the SEC may be able to come to an agreement prior to the 2020 court date, adding that the court most likely chose not to rush the decision:

“Since Telegram had already determined to delay its launch of TON (based primarily on the SEC’s injunction filing according to Telegram’s letter to investors), the court may have also taken the view that rushing to conduct the hearing on October 24 is no longer warranted.”

Gregory Klumov, CEO of the euro-pegged stablecoin Stasis, said that he expects the delay to impact the crypto markets:

“It is definitely a blow to crypto industry's ‘killer app’ fundraising. I anticipate bitcoin will outperform altcoins until there is regulatory clarity with TON.”

Related: Libra Loses Key Members, Potentially Forked — Still Looks Confident

Despite this, Klumov explained to Cointelegraph that the TON debacle, coupled with Facebook’s Libra conundrum, will accelerate discussion about regulation in the U.S. Klumov also outlined that the 1933 securities laws are outdated and unfit to deal with the technological advancements that have transformed the sector:

“It is impossible for that regulatory framework to address technological disruption of these centrally provided services. But its is now. Governments should wake up and follow the market that demands a new set of laws to support entrepreneurship in the space and not protect existing monopolies which grew to become too big to fail a while ago, already causing harm to the economy and society multiple times."

Who wields the power?

Regardless of when the rules were created, Rossow told Cointelegraph that there can be no misunderstanding that the legal authorities are in an undisputed position of power in the Telegram saga:

“The justice system here is in charge and in control, not Telegram or its TON blockchain project. Second, I think this is an attempt by the court to work parallel with the SEC in ensuring that in no way, can Telegram continue to allegedly violate U.S. securities law by allowing it to continue offering, selling, delivering, or distributing its ‘Grams’ to any person or entity.”

Rossow explained to Cointelegraph that the TON legal case could work out positively for future cases of crypto projects seeking regulatory approval. However, he also believes that, unfortunately for the crypto community, more cases like TON will have to be opened before regulatory clarity is reached. He explained: