Telegram Claims Recent Ruling Undermines SEC’s Case

Telegram has pointed to a fresh precedent that could bolster its argument against allegations it violated United States federal securities laws.

In a March 6 letter to Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York, Telegram brought attention to a recent case ruling it claims undermines the Security and Exchange Commission’s injunction against the firm. 

Telegram vs. the SEC: case recap

To recall, Telegram has been embroiled in a legal battle with the SEC since the latter launched an investigation last October into Telegram’s wildly successful 2018 $1.7 billion initial coin offering for the Telegram Open Network (TON). 

Ahead of its ICO, Telegram’s creators had filed a “Notice of Exempt Offering of Securities” — also known as a Form D — with the SEC for the first round of its offering, followed by a second such notice in March. The specific exemption used by Telegram, Form D 506(c), authorized the offering to be exclusively sold to accredited investors. 

The SEC nonetheless chose to investigate Telegram on the grounds that, once Telegram delivered Grams to its initial purchasers, they would be able to resell billions of the tokens on the open market to the investing public. 

In the agency’s view, the structure of the private offerings incentivized the development of a secondary market prior to the launch of the TON blockchain, leading the SEC to declare the offering illegal and to issue a temporary restraining order on token issuance.

Telegram’s new argument

In its letter on Friday, Telegram points to a recent March 3 ruling at the California Court of Appeal, Second Division — one that has little to do with crypto, but involves a legal conflict over a partnership to renovate and lease space in a building in downtown Los Angeles. 

In Telegram’s view, the California court’s judgment of the case presented by the plaintiff — “Siry Investment” — supports Telegram’s position against the SEC. 

Telegram argues there are similarities between the language used in the purchase agreement for its own Gram tokens and that used in Siry’s partnership agreement. Telegram wrote:

"As in Siry, these [Gram] provisions demonstrate that the economic reality of the private placement was not to distribute securities to the public in violation of the U.S. securities laws.”

Instead, Telegram continues, “these provisions reflect uncertainty on that question and a marked desire not to engage in transactions that would subject them to securities laws — an odd result if the parties already viewed [Grams] as a security."  

Even as Telegram and the SEC agree that the Telegram ICO private placements constituted a security, they disagree on the SEC’s view that not only the purchase agreements, but Gram tokens themselves, are securities. 

Here, again, Telegram points to the Siry case to bolster its arguments that Gram tokens should not be considered as such:

“The purchase agreements contained express provisions reflecting that (i) performance of the purchase agreement may not ‘violate any judgment, statute, rule or regulation applicable to it’ or ‘contravene any law, regulation or regulatory policy applicable to the purchase; and (ii) each purchaser warranted that it can only sell Grams ‘in accordance with applicable securities laws and the terms of this purchase agreement.’”

SEC response

The SEC, for its part, has taken issue with Telegram’s arguments and submitted a letter to the court on March 9. The commission stated that Telegram’s argument “continues Defendants’ erroneous and ultimately fatal reliance on labels over substance” and is another one of the firms  “persistent attempts to obscure the actual economic reality and terms of the transactions at issue in this case by pointing to legalese statements.”