Telegram argues “Grams” are not securities, as it seeks to rebuff SEC’s injunction application

Shortly after the United States Securities and Exchange Commission (SEC) launched an action against Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc., the defendants are seeking to rebut the accusations against them.

On October 16, 2019, the defendants submitted their response to the SEC’s emergency application for preliminary injunction.

In the document, seen by FinanceFeeds, the defendants say the SEC has insisted that Telegram consent to the entry of a preliminary injunction and also has insisted that Telegram, prior to October 24, (i) search for, collect and produce documents in response to 18 document requests and (ii) produce witnesses for two full Rule 30(b)(6) depositions this week.

According to Telegram, the SEC’s action hinges on a fundamentally flawed theory that Grams constitute a “security” subject to the US securities laws.

The defendants argue that, unlike other digital assets that were offered to the general public through so-called Initial Coin Offerings (ICOs), Telegram did not offer any securities to the public through an ICO. Rather, Telegram entered into private purchase agreements with a limited number of highly sophisticated purchasers that provided for the future payment of a currency (Grams) but only following the completion and launch of the TON Blockchain. Telegram says it has already treated the Private Placement as a securities offering pursuant to valid exemptions to registration under the Securities Act of 1933.

According to the defendants, the Grams themselves, as distinct from the purchase contracts, will merely be a currency or commodity (like gold, silver or sugar) — not a “security” — once the TON Blockchain launches.

Telegram requests that the Court deny the SEC’s request for a preliminary injunction and enter an order that maintains the status quo regarding the offer, sale or distribution of Grams; relieves Telegram of any obligation to produce documents or witnesses in response to the SEC’s emergency requests prior to October 24; and directs the parties to submit an expedited case schedule to resolve the legal issues underpinning the SEC’s claims.

According to the SEC’s complaint, Telegram Group and TON Issuer Inc. started raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger. The companies sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 US purchasers.

Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into US markets.

The SEC’s complaint alleges that the companies failed to register their offers and sales of Grams, which are securities, thus violating of the registration provisions of the Securities Act of 1933.