Chamber of Digital Commerce supports Telegram in unregistered digital token offering case

Maria Nikolova

The Chamber’s arguments run counter the SEC’s motion for a summary judgment against Telegram.

Shortly after the United States Securities and Exchange Commission (SEC) moved the New York Southern District Court for a summary judgment against Telegram Group Inc. and TON Issuer Inc. as a matter of law on its claim that the defendants made unregistered offers and sales of securities, a third party is trying to intervene in the case.

As per documents filed with the Court on January 21, 2020, the Chamber of Digital Commerce is trying to make the Court consider its amicus curiae brief. The latter is a statement by someone who is not a party to a case and is not solicited by a party, but who assists a court by offering information that bears on the case.

Although the Chamber of Digital Commerce does not explicitly state that its brief is in support of Telegram, it is apparent that the Chamber’s arguments run counter the SEC’s motion for a summary judgment against Telegram. Cutting the long story short, the Chamber of Digital Commerce argues that an asset does not become a security simply by virtue of being the subject of an investment contract (i.e., a securities transaction). The SEC, however, argues that this is the case and that Grams are, hence, securities and that Telegram is responsible for an $1.7 billion unregistered digital token offering.

In its amicus curiae brief, seen by FinanceFeeds, the Chamber of Digital Commerce presents itself as a not-for-profit trade association formed in 2014 to promote the acceptance and use of digital assets and blockchain-based technologies. The Chamber claims to represent more than 200 companies that are investing in and innovating with blockchain-based technologies.

The Chamber says it has a strong interest in the central issue in the SEC’s case against Telegram, in particular, the interest is on how the analysis of whether a transaction is an investment contract, and thus a “security,” is applied to transactions involving digital assets.

“Although the Chamber does not have a view on whether the offer and sale of Grams is a securities transaction, the Chamber has an interest in ensuring that the legal framework applied to digital assets underlying an investment contract is clear and consistent”, the Chamber’s brief says.

The Chamber requests the Court to distinguish the subject of the investment contract from the digital asset. This requires two separate analyses: (i) Whether there is an investment contract offered in a securities transaction; and (ii) whether the subject of the investment contract is a commodity that can be sold in an ordinary commercial transaction. It further requests that the Court affirm that a digital asset is not a security solely by virtue of being in digital form or recorded in a blockchain database.

In particular, the Chamber asks the Court to maintain the distinction between investment contracts and their underlying assets, making clear that an asset does not become a security simply by virtue of being the subject of an investment contract (i.e., a securities transaction). Let’s explain that this would pave the way for Telegram to claim that Grams are not securities and that, hence, Telegram should not be sued by the SEC.

This case concerns Telegram’ active promotion and sale of “Grams,” a form of digital token, which according to the SEC, is a security. In 2018, Telegram and TON Issuer effected a purportedly private sale of approximately $1.7 billion worth of Grams, with no registration statement in effect. The SEC argus that the defendants thus violated Section 5 of the Securities Act of 1933 (“Securities Act” or “Act”), 15 U.S.C. § 77e.

The SEC has asked the Court to consider the economic reality of what Telegram was doing: raising money to build a platform that would create value and profits for the investors. Much like a stock certificate, a Gram represents an asset, the SEC argues. When sold to the investors, that asset was an investment contract. And, upon the launch of the TON network, that asset will remain an investment contract. The sale of Grams was not registered and thus violated Section 5 of the Securities Act, the SEC concludes.

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