NY Court issues preliminary injunction against Telegram’s digital token offering

Maria Nikolova

The Court finds that the resale of Grams into the secondary public market would be an integral part of securities sale without a required registration statement.

The United States Securities and Exchange Commission (SEC) has managed to obtain a preliminary injunction against Telegram Group Inc. and TON Issuer Inc. that would halt the planned offering of “Grams,” a new cryptocurrency, to the public.

On March 24, 2020, Judge P. Kevin Castel of the New York Southern District Court issued an Opinion & Order granting the SEC’s motion for a preliminary injunction against the defendants.

Let’s recall that, in this case, the SEC seeks to enjoin Telegram from engaging in a plan to distribute “Grams,” in what it considers to be an unregistered offering of securities.

In early 2018, Telegram received $1.7 billion from 175 sophisticated entities and high net-worth individuals in exchange for a promise to deliver 2.9 billion Grams. Telegram contends that the agreements to sell the 2.9 billion Grams are lawful private placements of securities covered by an exemption from the registration requirement. According to Telegram, only the agreements with the individual purchasers are securities. Currently, the Grams will not be delivered to these purchasers until the launch of Telegram’s new blockchain, the Telegram Open Network (TON) Blockchain. Telegram considers the anticipated resales of Grams by the 175 purchasers into a secondary public market via the TON Blockchain as wholly-unrelated transactions and argues they would not be the offering of securities.

The SEC, however, sees things differently. The 175 initial purchasers are, according to the regulator, “underwriters” who, unless Telegram is enjoined from providing them Grams, will soon engage in a distribution of Grams in the public market, whose participants would have been deprived of the information that a registration statement would reveal.

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 Court finds that the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.

Telegram knew and understood that reasonable purchasers would not be willing to pay $1.7 billion to acquire Grams merely as a means of storing or transferring value, the Court says. Instead, Telegram developed a scheme to maximize the amount initial purchasers would be willing to pay Telegram by creating a structure to allow these purchasers to maximize the value they receive upon resale in the public markets.

The Court finds an implicit (though formally disclaimed) intention on the part of Telegram to remain committed to the success of the TON Blockchain post-launch. Indeed, Telegram, as a matter of fact rather than legal obligation, will be the guiding force behind the TON Blockchain for the immediate post-launch period while the 175 purchasers unload their Grams into the secondary market. As such, the initial 175 purchasers possess a reasonable expectation of profit based upon the efforts of Telegram because these purchasers expect to reap whopping gains from the resale of Grams in the immediate post-launch period, the Court says. The series of contracts and understandings centered on Grams are a security within the meaning of the Securities Act of 1933, according to the Court.

Shortly after the Judge issued the Opinion & Order, the defendants filed a notice of interlocutory appeal.

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