| SEC Wins
Injunction Against Telegram Distribution
of Mass-Market Crypto Grams
By Matthew
Russell Lee, Patreon
BBC
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SDNY COURTHOUSE,
March 23 -- On February
19 lawyers for Telegram and
the U.S. Securities and
Exchange Commission argued for
more than two hours about the
SEC's request for a
preliminary injunction against
Telegram's proposed crypto
currency, the Gram. More on
Patreon here.
Now on
March 24, in a world made
different by the Coronavirus
crisis, SDNY Judge P. Kevin
Castel has granted the SEC's
request for a preliminary
injunction, writing that "the Court finds
that the SEC has shown a
substantial likelihood of
success in proving that
Telegram’s present plan to
distribute Grams is an
offering of securities under
the Howey test to which no
exemption applies. The motion
for a preliminary injunction
will be granted." Full
decision for download via here.
By the end, their
agreement that Telegram will
hold off was extended, but
only under U.S. District Court
for the Southern District of
New York Judge P. Kevin Castel
rules on the SEC's request.
Judge Castel said he is
mindful of an April 30
deadline by which Telegram
would have to return
investors' unspent money.
In essence the
SEC argues that Telegram's
raising of $1.7 billion to
lead to the Gram crypto
currency was an offer of
securities which should have
been registered with the SEC
in the 1946 test set out by
the Supreme Court in SEC
v. W. J. Howey Co., 328
U.S. 293.
That case involved oranges,
and that fruit as well as gold
and even Mets season tickets
were used as examples by the
two sides, vying for Judge
Castel's ruling. (The Mets
tickets analogy used by
Telegram's Skadden Arps
attorney Alexander C Drylewski
caught Judge Castel's
attention: he said the Mets
improving the roster sounded
like "a fantasy," drawing
laughter in the packed
courtroom).
More
seriously, Drylewski
emphasized that Telegram would
not be a validator of the TON
blockchain, and therefore
investors were not banking on
Telegram's continuing
involvement in management.
SEC lawyer
Jorge Gerardo Tenreiro
countered that Telegram
founder Pavel Durov had
admitted, in a deposition the
SEC conducted, that he cares
deeply about the reputation of
Telegram.
On that basis, Judge Castel
repeatedly asked Drylewski to
admit that Telegram would get
involved in a sufficient
community of validators did
not immediately
emerged.
Drylewski answered that
Telegram could not do that,
then said that Telegram had
represented that it would
not. Judge
Castel asked, "Which is
it?"
Drylewski
countered that since the
validators would have to agree
by a two-thirds margin, no one
actor would control things.
This, he said with some
effect, was the benefit of
blockchain and this crypto
currency in particular.
He compared Grams favorably to
both Bitcoin and Ethereum,
while saying that Telegram got
its idea of a TON Foundation,
not yet in existence, from the
foundations of Bitcoin and
Ethereum. The
upshot is that Judge Castel
will grant or not grant the
SEC requested preliminary
injunction before April 30.
Drylewski offered
that Telegram could live with
injunctions against particular
parts of its plan as long as
the overall plan can go
forward. He painted a picture
of developers adding apps and
smart contracts to the TON
blockchain and Grams
becoming a "new
mass-market crypto currency"
unlike Ethereum or Bitcoin.
That remains to be seen.
***
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