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On November 12th 2019, Telegram filed a response with a United States District Court. The firm has maintained the stance that its Grams tokens do not constitute securities and requested the court to dismiss the SEC’s claims and deny any relief sought by the SEC.
Popular messaging app Telegram raised $1.7 billion in a two-part Initial Coin Offering (ICO). The second part was a private sale, with a $1 million minimum investment. According to a Securities and Exchange Commission (SEC) filing, the funds were intended to develop the Telegram Open Network (TON) blockchain, to enhance the firm’s existing Telegram Messenger app, and for “other purposes described in the offering materials”.
The tokens, referred to as “Grams”, have yet to be issued. Almost 3 billion tokens were sold during the offering, however. Initially, they were scheduled to have been distributed by October 31st, 2019. That is, until the SEC stepped in.
On October 11th, the SEC received a temporary restraining order which ultimately halted Telegram’s ICO and token issuance. According to the SEC, Telegram failed to register both of its offers as well as its sales of Grams tokens. Since the SEC says Grams are securities, Telegram is alleged to have violated the Securities Act of 1933.
At the time, Steven Peikin of the SEC’s Division of Enforcement said,
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token. Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Telegram quickly responded to the SEC’s allegations by denying them altogether. The firm says its offering did not constitute a securities offering. In an official response dated October 16th, Telegram said,
“… it is apparent that the SEC is attempting to seize upon the Order to Show Cause, submitted by the SEC and entered ex parte, to steamroll Telegram into consenting to a preliminary injunction where there is no need. The SEC’s unreasonable and wholly unnecessary position has thus necessitated this filing two days in advance of Telegram’s ordered deadline of October 18.”
Telegram subsequently postponed its token issuance, voluntarily. It then asked investors to either accept a delay until April 2020 or receive “approximately 77%” of their initial investments back.
Telegram’s case with the SEC has yet to break free from controversy. The company has now turned to a U.S. court in a request to drop the SEC’s charges which allege its Grams tokens are securities.
On Tuesday, Telegram filed a defense with the Southern District Court of New York. The company has rejected all allegations made by the SEC. The allegations claim Telegram’s offering — which raised nearly $2 billion — was an unregistered, and therefore illegal, securities offering.
Telegram recently told the District Court,
“[The SEC’s] claims are without merit as Telegram’s private placement to highly sophisticated, accredited investors was conducted pursuant to valid exemptions to registration under the federal securities laws and Grams will not be securities when they are created at the time of launch of the TON Blockchain”.
The firm says it has consistently been cooperative with the SEC, by voluntarily engaging with the commission in search of regulatory guidance and pausing the ICO on its own accord. According to Telegram, the SEC never provided the guidance that was sought. In the latest filing, Telegram continued,
“[The SEC] has engaged in improper ‘regulation by enforcement’ in this nascent area of the law, failed to provide clear guidance and fair notice of its views as to what conduct constitutes a violation of the federal securities laws, and has now adopted an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of its own high-ranking officials.”
Telegram says it never filed a registration statement since this isn’t required according to federal securities laws. The company subsequently denied that the SEC is entitled to any relief and asked the court to “dismiss the claims against [Telegram] with prejudice and order such further relief as the Court deems just and proper.”
What do you think about Telegram’s battle with the SEC? Do you think the District Court will throw out the case as requested by Telegram? We want to know what you think in the comments section below.
Image courtesy of SportyCo.