Telegram and SEC Crypto Debate Continues


Both the Securities and Exchange Commission and messaging app Telegram filed motions for summary judgment in the ongoing securities fraud case concerning Telegram’s initial coin offering (ICO) as it pivots from messaging to cryptocurrency. In October, the SEC filed a complaint stating that the $1.7 billion that Telegram raised from its ICO was an unregistered securities sale. More filings requested that Telegram provide documentation in regards to those funds, Telegram initially refused to disclose information about the $.7 billion it raised, but the company agreed to disclose bank statements on January 13.

The SEC’s motion for summary judgment claimed that Telegram raised funds from investors through the unregistered offering of its Gram tokens. Telegram did not register Grams ICO with the SEC or supply investors with required information. The SEC argues that Telegram made unregistered offers and sales of securities via the sale of Grams.

In its motion for summary judgment, the SEC stated “In 2018, Defendants effected a purportedly private sale of approximately $1.7 billion worth of Grams, with no registration statement in effect.  Accordingly, Defendants violated Section 5 of the Securities Act of 1933 (“Securities Act” or “Act”), 15 U.S.C. § 77e.  The SEC now seeks summary judgment for this claim because the relevant transactions, the lack of a registration statement, and the fact that Grams are securities can all be established with undisputed evidence.” The purchase of Grams was an investment and an asset because it helped Telegram grow and investors expected to benefit from Telegram’s success. As a result, Telegram should have registered Grams as a security, according to the SEC. According to the SEC, “Telegram cannot meet its burden to establish that the Offering is exempt from registration.”

Telegram also filed a motion for summary judgment claiming those who purchase Grams will not expect to profit and Telegram made no such promises; Grams are for “consumptive use.” Telegram submitted that “the SEC has impermissibly stretched its jurisdiction far beyond what the law allows and that Grams, when launched, will not be a security but rather a currency or commodity subject to anti-fraud and anti-manipulation oversight by the U.S. Commodity Futures and Trading Commission.”

Grams, Telegram argues, do not have the typical characteristics of a security. For example, “Grams will not entitle purchasers to any income, any dividends, or any interest in Telegram…nor do they resemble stock or any other form of equity.” Instead, Telegram claims Grams are a medium of exchange. There is no “common enterprise” in Grams after its launch. Telegram claimed that “whether Grams are securities depends on their circumstances after launch of the TON blockchain,” and the “SEC’s failure to provide clarity and fair notice regarding its claims weighs in favor of [Telegram].” Additionally, Telegram stated that its “private placement does not constitute a ‘past violation’ of the Securities Act” and that the SEC must make a “‘clear showing’ of a prima facie case of a past violation of the securities laws and a ‘reasonable likelihood’ of future violations,” which it claims the SEC has not made.

Hearings on a preliminary injunction are set for next month. The case is before the New York Southern District Court. Telegram is represented by Skadden, Arps, Slate, Meagher & Flom.