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Federal court judge grants temporary injunction against Telegram

source-logo  decrypt.co 24 March 2020 20:13, UTC

A federal court judge today sided with the SEC against Telegram and granted a preliminary injunction in the messenger app’s $1.7 billion initial coin offering. 

In an “opinion and order” filed with the New York court today, U.S. District Judge P. Kevin Castel found "that the SEC has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities under the Howey test."

The Howey test is a defacto test created by the Supreme Court for determining whether certain transactions qualify as investment contracts.

In 2018, messaging app Telegram raised $1.7 billion in an ICO in exchange for a promise to deliver 2.9 billion gram tokens to 175 wealthy investors. Telegram argued that agreement was lawful under private placement of securities covered by a Regulation D 506(c) exemption.

Court extends delays to Telegram's blockchain network pending ruling

The argument

The SEC argued in October that the token sale for the Telegram Open Network was illegal, because Grams constituted securities under US law, and sales of securities have to be registered with the agency. Telegram has disputed that claim, but agreed to hold off launching the network until the case is resolved with the SEC.

Telegram had argued that the original agreements with the purchasers were indeed securities. But it said that a secondary sale of grams to the public, which would happen once it launched its Telegram Open Network, or TON, blockchain, would be unrelated and not securities. 

Telegram loses major fight w/ big potential implications for other SAFT token projects. tldr below

+ Court says that Grams are most likely a security.

+ Court focuses economic realties, per below.

+ Injunction entered to prevent delivery of grams (b/c unregistered securities). pic.twitter.com/V2GhFOTbMv

— Palley (@stephendpalley) March 24, 2020

The SEC saw things differently, and has been fighting to stop the secondary sale of grams. On October 11, 2019, the SEC secured a temporary injunction to halt the launch of TON, which was originally slated for the end of that month. (Grams could not actually exist until the blockchain launched.) And since then, the agency has been pushing for a permanent injunction. 

Moving closer to a permanent injunction

Today, the SEC moved one step closer in securing that permanent injunction.

“Considering the economic realities under the Howey test, the Court finds that in the context of the scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a registration statement,” Castel said. 

He went on to write that “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 and transferring value. Instead, Telegram developed a scheme to maximize the amount initial purchasers would be willing to pay by creating a structure to allow these purchasers to maximize the value they receive upon resale to the market.”

Though Castel’s courtroom is closed due to the general quarantine, his ruling had been expected before April 30. Due to a clause in the purchase agreements Telegram issued for Grams, if the TON network hadn't launched by April 30, investors could be entitled to get their money back.

decrypt.co