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The United States District Court has sided with the Securities and Exchange Commission (SEC) by granting its request for a preliminary injunction against cloud-based instant messaging app Telegram.
SEC seeks to enjoin Telegram Group Inc. and TON Issuer Inc., collectively known as Telegram, from distributing its new cryptocurrency “Grams,” which SEC considers “unregistered offerings of securities.” In 2018, Telegram received $1.7 billion from 175 sophisticated entities and high net-worth individuals in exchange for 2.9 billion Grams.
Telegram insists that the agreement to sell 2.9 billion Grams is lawful because it is covered by an exemption from the registration requirement. In its view, it only considers the agreements with individual purchasers as securities.
Also, Telegram argues that the Grams will not be delivered to the purchases until the launch of Telegram’s new blockchain, the Telegram Open Network (“TON”) Blockchain. It also deems the anticipated resales of Grams into a secondary public market via the TON blockchain as wholly-unrelated transaction and they would not be offering securities.
SEC disagrees and the court supports it granting an injunction and ordering Telegram to stop its issuance of Grams.
“The Court finds that the SEC has shown a substantial likelihood of success in proving that the Gram Purchase Agreements, Telegram’s implied undertakings, and its understandings with the Initial Purchasers, including the intended and expected resale of Grams into a public market, amount to the distribution of securities, thereby requiring compliance with section 5,” the court wrote.
“Telegram has failed to establish an exemption to the registration requirement under either section 4(a)(2) or Rule 506(c). Further, the Court concludes that the SEC has shown that the sale and imminent delivery of Grams represent a single ongoing violation of section 5. 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.”
Meanwhile, earlier this year, the court rejected SEC’s request to compel Telegram to disclose its bank records. SEC wanted to know how Telegram spent the $1.7 billion it raised via initial coin offering (ICO). Telegram responded by calling SEC’s request “unfounded fishing expedition.”
