One of the biggest questions to dominate the fledgling cryptoeconomy has been over which token issuances the U.S. Securities Exchange Commission (SEC) considers to be unregistered security offerings.
Since the SEC always faces a backlog of work, it takes time to find out which issuances have raised the Commission’s ire and what the precise results of such ire will be.
Against this backdrop, instant messaging company Telegram has found itself at the center of a major and early de facto case study in progress. The firm has been embroiled with the SEC in court for months in resisting the argument that sales of its GRAM token sale — which have raised $1.7 billion USD to date — were unregistered securities offerings under U.S. federal law.
Unfortunately for Telegram, then, the company’s defense seemingly received a big blow on Tuesday, March 24th, when the U.S. District Court for the Southern District of New York (SDNY) sided with the SEC in ordering a temporary enjoinder, or prohibition, against further GRAM distributions.
“Disguised Public Distribution,” Judge Says
Simply put, you can’t sell securities to U.S. investors without registering with the SEC or without securing an exemption from the agency. It’s now clearer that Telegram did neither, per a new decision from SDNY Judge Kevin Castel.
On Tuesday, Judge Castel found that the SEC appeared primed to win its case against Telegram as the Commission had made a strong case that the company’s sales of GRAM had run afoul of the Howey Test, a rubric designed by the U.S. Supreme Court in 1946 to determine whether an asset was a security in the country.
“The Court finds that the SEC has shown a substantial likelihood of success in proving that the Initial Purchasers’ investment was made with a reasonable expectation of Telegram’s essential entrepreneurial and managerial efforts to develop and support the [Telegram Open Network] Blockchain and Grams,” Judge Castel said.
Specifically, the Howey Test hones in on whether an investment’s performance is intimately connected to the productive efforts of a third party. Taking the wider context of Telegram’s GRAM sale into consideration, Judge Castel agreed this dynamic was the case for the GRAM and that, since registration or an exemption hadn’t been secured, distribution of the token needed to be stopped accordingly.
“The Court concludes that Telegram’s offers and sales of the Grams represent an ongoing violation … and that the final step of this public distribution of a security without a registration statement must be enjoined,” the judge added.
The Enjoinder Isn’t Permanent … For Now
The Telegram vs. SEC case isn’t over, as Judge Castel’s injunction against GRAM distributions is a temporary one presently.
Still, the development puts Telegram in the opposite position from where it wants to be in the case right now, and it suggests the SEC is pulling away with the fight in the SDNY.
Of course, it’s possible the case produces more twists and turns yet, but one could reasonably infer at his point that it’s only a matter of until the SEC secures a victory against Telegram, which would pave the way for Judge Castel’s injunction to shift from temporary to permanent one.
If such a scenario plays out, it will cast a pall over Telegram’s legal maneuverings against the SEC to date.
That is simply to say that in recent years the SEC has shown leniency to crypto projects that have worked closely with the Commission to right their wrongs. On the flip side, the agency has also demonstrated a willingness to show no quarter to projects that fight the SEC’s regulation rather than abide it.
Telegram’s court battle may go down as a big lesson in the cryptoeconomy in what not to do when the SEC comes knocking, in other words.