The war between SEC and Gram: Telegram speaks up
The war between SEC and Gram: Telegram speaks up

The war between SEC and Gram: Telegram speaks up

By Massimo Simbula - 14 Nov 2019

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On November 12th, Telegram Group Inc. and TON Group Inc. deposited a statement with the District Court of New York, as part of the proceedings initiated on October 11th by the SEC in which the latter requested to block the TON Blockchain Network project and the Gram Token Sale in the United States, on the grounds that it violated the regulations on financial instruments, in particular, those relating to securities in the United States.

Telegram confirmed that TON Blockchain Network is being structured thanks to a first private funding (first private placement) started in January 2018 for a total amount raised by highly qualified investors, equal to approximately 850 million USD for the pre-purchase of Token Grams.

Funding was provided on the basis of Rule 506(c) of Regulation D for US resident buyers and Regulation S for foreign buyers of the US Securities Act of 1933.

The investment contract signed by the qualified investors provided that, if the Gram token was not launched by October 31st, 2019, Telegram would return all investments to the relevant investors: obviously Telegram would have agreed otherwise with the investors following the block imposed by the SEC.

On February 13th, 2018, Telegram notified the SEC of its first private placement in derogation of the provisions of the securities act of 1933 (namely, the “Notice of Exempt Offering of Securities”).

Subsequently, in March 2018, Telegram completed the collection of investments from qualified investors for an additional USD 850 million (second private placement), again in derogation of the SEC regulations, thus bringing total deposits to approximately USD 1.7 billion.

Of this USD 1.7 billion, approximately USD 218 million would have been used (as of 31st January 2019).

The second private placement was notified to the SEC on March 29th, 2018.

According to Telegram’s lawyers, this investment transaction could be classified within the scope of the regulations on investment contracts and, in the relative acts, all the clauses typically required for the application of the cited regulations were included: in fact, reference is made in particular to the limitations relating to the offer, sale and transfer of the Gram tokens.

Telegram also points out that the Gram tokens have not yet been issued and therefore it is impossible to define them in any way. Surely, according to Telegram’s lawyers, they cannot be defined as “securities” but could instead be considered as Payment Tokens useful for solving a series of problems for the purchase of goods and services on the network which, according to the Durov brothers, would not seem to be completely solved with Bitcoin and Ethereum and this, of course, remains to be seen.

The core of Telegram’s defence is contained on page 16, point 2 of the same where it invokes the right to a fair trial established by the fifth amendment of the US Constitution and the precedent of 2012 concerning the decision of the Supreme Court to consider illegitimate a sanction issued by the Federal Communication Commission against Fox Television.

It also mentions the important precedent of 2008, relating to the case between the United States and Williams, where the following was specified:

“A conviction fails to comport with due process if the statute under which it is obtained fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement”
(United States v. Williams, 553 U.S. 285, 304 – 2008).

In essence, the point Telegram’s lawyers intend to make is this: in the absence of a clear rule or regulation, the SEC cannot declare illegitimate the sale of the Gram tokens in the United States on the basis of a particularly extensive interpretation of rather outdated rules (remember that the Securities Act dates back to 1933) relating to a technology and basic concepts that are particularly elusive and around which states around the world are now wondering as to how to frame and regulate them.

This aspect is reiterated in the rest of the statement, condemned by numerous precedents which specify that, in the presence of vague and imprecise rules and regulations on certain prohibitions or limits, no convictions can be issued against those who, according to an average canon of intelligence, could not really understand the scope of such rules and regulations. Otherwise, as stated above, arbitrary and discriminatory convictions would be permitted.

Of particular interest is also the clear reference (I would argue a real accusation) to the conduct of some senior SEC officials who, with their public statements, would have somehow (though actually indirectly) reassured Telegram about the substantial admissibility of the project, thus creating a reliance on the legitimacy of the sale of Gram as proposed.

In this regard, it is worth mentioning the public statements of SEC President Jay Clayton, made in 2017, the statements of April 5th, 2018, the statements of June 6th, 2018 and, again, those of November 2018.

Telegram’s attorneys focus heavily on the contradiction and, perhaps, on the confusion generated by these public statements, such as to create a level of trust or confusion, on the correct conduct to be taken in relation to the Securities Law of 1933.

One last curiosity: Telegram’s lawyers wanted to confirm, in an intuitively understandable way, that Pavel Durov, the founder and CEO of Telegram Group Inc, is a citizen of Russia and St. Kitts and Nevis (the two islands of the Lesser Antilles in Central America), and that he was a fierce opponent of the Russian government and left Russia (presumably because of his anti-government position).

It is probable, therefore, that the personal situation of the Durov brothers will also be included in the process and, therefore, at least in the eyes of American public opinion, their “ethically correct” behaviour would be, in some way, contrary to certain government policies adopted in Russia.

We still don’t know if all these issues will be considered relevant by the District Court of New York, although certainly this case, however it will end, will represent one of the most important judicial precedents and to which the whole crypto world looks with great interest and apprehension.


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