In Telegram’s Case, Court Sides With SEC, Prohibits Issuing GRAMs

A United States District Court has granted the SEC‘s request for an injunction against Telegram, banning the company from issuing its GRAM tokens at the present time.

Court states that GRAMs are securities according to Howey test

According to March 24 filing granting the Securities and Exchange Commission’s request for a preliminary injunction, the Court wrote the following:

“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 SEC and Telegram: A hate story

The Telegram court case started in October last year after the 2018 initial coin offering (ICO) for the Telegram Open Network (TON).

As with many ICOs, the SEC decided that under the 1934 Howey Test, such offerings are classified as the sale of unregistered securities.

Telegram had insisted that since it filed a Form D 506(c) Notice of Exempt Offering of Securities before the first round of its offering it had the right to sell tokens to accredited investors.

However, the Court noted in granting the injunction requested by the SEC that Telegram wanted the Gram tokens to get to the secondary market, which disqualifies them from exemption:

“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) or Rule 506(c).”

In a sentence which may be catastrophic to many issuers of tokens via ICO, the Court denied Telegram’s argument that the Gram would represent a commodity once released and thus fell outside the SEC’s regulation.

“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 set of contracts, expectations, and understandings centered on the sales and distribution of the Gram. Howey requires an examination of the entirety of the parties’ understandings and expectations.”

Concluding that the court has to interrupt the delivery of GRAM tokens, the filing states:

“The Court also finds that the delivery of Grams to the Initial Purchasers, who would resell them into the public market, represents a near certain risk of a future harm, namely the completion of a public distribution of a security without a registration statement. An injunction, prohibiting the delivery of Grams to the Initial Purchasers and thereby preventing the culmination of this ongoing violation, is appropriate and will be granted.”