SEC seeks summary judgment against Telegram in unregistered digital token offering case

Maria Nikolova

The US regulator says it is entitled to summary judgment as a matter of law on its claim that Telegram made unregistered offers and sales of securities.

The enforcement action launched by the United States Securities and Exchange Commission (SEC) against Telegram Group Inc. and TON Issuer Inc. over alleged $1.7 billion unregistered digital token offering continues at the New York Southern District Court.

Documents filed with the Court on January 15, 2020, and seen by FinanceFeeds, reveal that the US regulator is pushing for summary judgment against the defendants. The SEC insists that it is entitled to summary judgment as a matter of law on its claim that Telegram made unregistered offers and sales of securities.

To avoid liability, the regulator says, Telegram has the burden to prove that its transactions were exempt from these requirements. However, because Telegram’s offers and sales were but an intermediary step towards its ultimate, indisputable goal – the worldwide distribution of Grams – no exemption is available, the SEC argues.

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 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 SEC notes that that the investment contract the defendants marketed to institutional investors in exchange for $1.7 billion was the quintessential transaction where investors funded a company’s growth hoping to profit from its continued efforts and future successes. Telegram solicited these investments by fueling these expectations. It touted the past successes of its founders in this space and the expertise of its programmers and its promised future efforts to build an ambitiously revolutionary “TON network.” And it highlighted the large user base for its preexisting product, Telegram Messenger, and how integrating the network into Messenger could create “demand and value” for the Grams. Telegram also sold Grams at steep discounts from an expected opening “reference price,” according to a formula Telegram promised to use to support market prices. All of this, the SEC stresses, further fed investors’ expectations of profits from Telegram’s economically-aligned efforts.

The SEC explains that, given these inducements, investors who entered into a “Purchase Agreement for Grams” with Telegram knew that, to make a profit, they would need Telegram to deliver on its promised efforts to build the TON network to create value for Grams and to expand Messenger to foster demand and value for the Grams.

All of this was true, according to the SEC, when Telegram and its investors entered into the sale agreements. At that moment, the regulator says, the investors incurred a legally binding obligation to pay for and receive Grams, and Telegram similarly entered into a legally binding obligation to deliver them. Grams would remain investment contracts upon delivery.

The SEC asks 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. 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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