Telegram Token Issuance Halted By Judge As Requested By SEC
March 25, 2020
A US Judge has stopped the token issuance by Telegram following the request from the Securities and Exchange Commission (SEC).
Telegram Ordered to Stop Gram Token Issuance
Messaging platform, Telegram, has been ordered by a U.S. Judge to stop its planned Gram token issuance next month. As such, the judge granted the request of the US SEC, which is currently looking into Telegram and its cryptocurrency, Gram.
A preliminary ruling issued by U.S. District Judge P. Kevin Castel of the Southern District of New York on March 24 mentioned that the SEC had shown a plausible case indicating that Telegram sold unregistered securities. The SEC sued the messaging platform in October last year, stating that the company went against federal law, following its $2 billion token sales in 2018.
According to the judge, the court found that the regulator has shown substantial evidence that the contracts and understandings at issue, which includes the sale of 2.9 billion Gram tokens to 175 buyers in exchange for $1.7 billion, are connected to a larger scheme to share those Gram tokens to a secondary public market, and this would be supported by Telegram’s ongoing activities.
Judge Castel, while giving reference to the $1.7 billion generated by Telegram in its token sale, stated that the company developed a project that allowed it to maximize the amount initial purchasers were willing to pay for the crypto tokens. He argued that Telegram achieved that by creating a structure that allowed them to optimize the purchasers’ profit upon resale.
The Howey Test
The judge further added that the economic realities of the token sale fell under the Howey Test. Thus, the court finds that in the context of the scheme, the resale of the Gram tokens to a secondary public market would be crucial to the sale of securities, without registering with the relevant authorities.
While conducting the Howey Test, the judge noted that the buyers would expect to make a profit from their investment. While Telegram had stated that profits are not the reason behind the further development of their Telegram Open Network (TON) blockchain, it would definitely be considering the investment made by the buyers.
Judge Castel stated a clear difference between the Gram tokens when they are finally live and the securities customers bought during the initial coin offering of the cryptocurrency. He further wrote that the court rejects the company’s characterization of the purported security in the current case. Although it is helpful as a shorthand reference, Judge Castel concluded that the security, in this case, is not the Gram token. According to the judge, the Gram is nothing more than an alphanumeric cryptographic sequence.
Telegram has been battling the case with the Securities and Exchange Commissions for the past few months now. In a February hearing, Judge Castel told attorneys from the SEC and Telegram not to get hung up on labels.
The sentence could deliver a heavy blow to many token issuers through the ICO model if Telegram fails to win this case. However, it is highly unlikely that the case has ended as Telegram might seek rulings from other higher courts in the country.