The Securities and Exchange Commission received an injunction against Telegram, a messaging app company, in a securities fraud case concerning Telegram’s cryptocurrency, halting the sale of Gram tokens and the launch of the Telegram Open Network (TON) blockchain. Telegram immediately entered a Notice of Appeal to bring the case before the Court of Appeals for the Second Circuit.
Telegram Group Inc. and TON Issuer Inc. are represented by Skadden, Arps, Slate, Meagher & Flom. In January both the SEC and Telegram filed motions for summary judgment in the case which is located in the Southern District Court of New York. Telegram Messenger has approximately 300 million monthly users around the world and, according to the order, has been described as the “cryptocurrency world’s preferred messaging app.”
Telegram Group Inc. and TON Issuer Inc. planned to distribute a cryptocurrency called “Grams.” The SEC alleges the Grams would be an unregistered offering of securities. Telegram was given $1.7 billion from investors and promised to give 2.9 billion Grams in exchange when the cryptocurrency is available. Telegram claims the agreement is a “lawful private placement of securities covered by an exemption from the registration requirement,” and the eventual release of Grams to the 175 purchasers after the opening of TON Blockchain is an unrelated transaction and not the offering of securities, according to the order. They argued the two transactions should be viewed separately.
“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,” the Order says, explaining why the injunction was granted. The Order also says the Court found a substantial likelihood that Telegram’s plan to distribute Grams would be considered an offering of securities under the Howey test.
The SEC said they see the 175 purchasers as underwriters who will “soon engage in a distribution of Grams in the public market,” and they would have been deprived of information they should have received in a registration statement. The SEC filed a temporary restraining order against Telegram in October of 2019 claiming that the Grams needed registration with the SEC to be traded.
“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement in an October press release after they filed for a temporary restraining order. “We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”
