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SEC v. Telegram Group

United States District Court for the Southern District of New York

March 24, 2020, Decided; March 24, 2020, Filed

19-cv-9439 (PKC)

Opinion

OPINION AND ORDER

CASTEL, U.S.D.J.

The Securities and Exchange Commission ("SEC") seeks to enjoin Telegram Group Inc. and TON Issuer Inc. (collectively "Telegram") from engaging in a plan to distribute "Grams," a new cryptocurrency, 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 [*3]  the agreements to sell the 2.9 billion Grams are lawful private placements of securities covered by an exemption from the registration requirement. In Telegram's view, 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 views 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 sees things differently. The 175 initial purchasers are, in its view, "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.

Cryptocurrencies (sometimes called tokens or digital assets) are a lawful means of storing or transferring value and may fluctuate in value as any commodity would. In the abstract, an investment of money in a cryptocurrency utilized by members of a decentralized community [*4]  connected via blockchain technology, which itself is administered by this community of users rather than by a common enterprise, is not likely to be deemed a security under the familiar test laid out in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). The SEC, for example, does not contend that Bitcoins transferred on the Bitcoin blockchain are securities. The record developed on the motion for a preliminary injunction presents a very different picture.

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

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2020 U.S. Dist. LEXIS 53846 *

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, -against- TELEGRAM GROUP INC. and TON ISSUER INC., Defendants.

CORE TERMS

Grams, Purchasers, Blockchain, Messenger, Sales, launch, Round, offering, exemption, investor, lockup, cryptocurrency, integrate, post-launch, users, fortunes, billion, resale, economic reality, transactions, securities law, Securities Act, commonality, understandings, delivery, profits, registration requirement, public offering, distributed, reasonable expectation