On October 11, 2019, the SEC obtained a temporary restraining order (TRO) against Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc., precluding them from delivering "Grams" – a cryptocurrency – to 171 initial purchasers by the end of the October 2019. The gravamen of the SEC's complaint is that Grams are unregistered securities and that the initial purchasers will immediately resell them, thus "flood[ing] the U.S. capital markets with billions of Grams . . . ." The TRO, issued by Judge Castel of the United States District Court for the Southern District of New York, also orders the defendants to preserve documents, permits the SEC to serve document requests and take depositions, and permits service of papers on defendants' U.S.-based counsel.
Telegram operates the popular messaging platform of the same name. According to the SEC's complaint, during an initial offering period open from January through March 2018, defendants raised $1.7 billion from the sale of 2.9 billion Grams to 171 initial purchasers. Thirty-nine of the initial purchasers were U.S. purchasers, from whom Telegram raised $424.5 million. The SEC alleged that Telegram is using the proceeds raised from initial purchasers to "capitalize its business and finance the creation of its new blockchain platform – the 'Telegram Open Network' or 'TON Blockchain.'" The SEC further alleged that agreements entered into by Telegram with the initial purchasers "did not contain information about Telegram's financial history or ability to generate profits, and purchasers who may buy or receive Grams will not receive any document containing information about Defendants' operations, financial condition, or other factors relevant in considering whether to invest in Grams."
Notably, while Telegram had taken the position that the purchase agreements themselves were investment contracts – and thus securities – it asserted that Grams themselves were not a security, but rather a currency. The SEC disagreed and alleged that Grams were investment contracts and thus securities. The SEC asserted that Telegram led purchasers to expect that its entrepreneurial efforts would drive the success or failure of Grams. For example, the SEC noted that Telegram emphasized in various offering documents – including "Teasers," "Primers" and a white paper – as well as in private communications to potential purchasers, that Telegram was integral to the success of the TON Blockchain project. These documents contained statements that Telegram "'will use its expertise to create TON'" and touted Telegram's principals' "'over 20 years of experience in building billion dollar companies use by hundreds of millions of people[.]'" Telegram also cited its "'world-class team of 15 developers . . . experience[d] in building scalable projects for tens of millions." In particular, the Primers "made clear that Telegram's work would continue for some years after delivery of Grams on the new TON Blockchain and would remain critical for the foreseeable future."
The complaint further alleged that Telegram and its principals' statements in these documents and elsewhere led purchasers of Grams to expect to profit from their efforts. It was notable to the SEC that early initial purchasers of Grams received discounts, suggesting that purchasers intended to profit from an anticipated increase in value in Grams once they were distributed. Indeed, a graphic from one of the Primers indicated that the price of Grams would necessarily increase as the volume of sales increased. In its pitch to one U.S. investor, Telegram and its principals touted the "'chance for 0x-50x' return on the investments."
The court will hold a hearing on the SEC's application for a preliminary injunction on October 24, 2019.
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