UPDATED 21:52 EDT / MARCH 24 2020

BLOCKCHAIN

Court rules in favor of the SEC in ongoing Telegram token sale case

Telegram Group Inc.’s token sale has suffered a new blow today as a U.S. District Court judge ruled in favor of a temporary restraining order issued by the U.S. Securities and Exchange Commission.

The SEC obtained the temporary restraining order against Telegram in October claiming that its 2018 TON blockchain token sale was offered as an unregistered security. U.S. District Judge P. Kevin Castel of the Southern District of New York agreed that the SEC demonstrated a plausible case that Telegram sold unregistered securities in breach of U.S. securities law.

“The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts,” the judge wrote, according to Coindesk.

“Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement,” the judge added.

The Howey Test was created by the U.S. Supreme Court in 1946 to determine whether certain transactions qualify as investment contracts and hence subject to securities law.

Telegram raised $1.7 billion in a sale of tokens in 2017. The private token raise was so popular that the company canceled plans to offer its tokens in an initial coin offering in May 2018.

Telegram is one of several high-profile blockchain companies that have been targeted by the SEC for allegedly breaching securities law. Messaging app firm Kik Interactive Inc. was sued by the SEC in June for also allegedly breaching U.S. securities law. The SEC claimed that Kik sold their Kin tokens as an investment opportunity while Kik countered that that the ICO was for a currency and not an investment opportunity under securities law.

While the SEC sues on one hand, one of its commissioners is proposing to provide safe-harbor provisions for cryptocurrency token sales in the future.

SEC Commissioner Hester Peirce said in February that under her proposal, crypto startups would have a three-year grace period from their first token sale to achieve a level of decentralization sufficient to be compliant with securities laws, including the Howey Test. The safe-harbor provision would in theory include coverage for firms such as Telegram as well.

Image: Telegram

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