Former Member of SEC’s Cyber Unit Comments on Telegram Enforcement Action: Did Telegram Fully Comply with Reg D?

Telegram, issuer of one of the highest-profile token offerings of all time that raised $1.7 billion, is in the midst of a protracted legal battle with the Securities and Exchange Commission (SEC). Last October, the SEC filed an emergency action and obtained a temporary restraining order against Telegram as the legal battle lines were drawn.

At that time, Telegram countered that the SEC was attempting to “steamroll Telegram into consenting to a preliminary injunction where there is no need.”

This week, the judge overseeing the case, P. Kevin Castel, allowed Telegram some additional time in complying with a demand by the SEC to receive its banking records.

Crowdfund Insider received some insight from Philip Moustakis, counsel at Seward & Kissel LLP. Moustakis is a former SEC attorney having been a member of the SEC’s Cyber Unit from its inception where he focused on cryptocurrencies and initial coin offerings (ICOs).

Moustakis said the SEC’s letter motion and Telegram’s response, taken together, indicate there is a disagreement concerning the facts and circumstances of Telegram’s offering to which the bank records the SEC seeks likely would be highly relevant.

“… though the court’s order denies the SEC’s request for bank records, it does so without prejudice, not on relevance grounds, but rather for Telegram to propose a schedule for their review to ensure their production complies with foreign data privacy laws, a concern raised by Telegram,” said Moustakis. “One of the factual disputes in the case centers on whether Telegram complied with the requirements of Regulation D in its offer and sale of “Purchase Agreements for Grams.”

Moustakis added that the SEC alleges that Telegram offered and sold Purchase Agreements in a manner that did not comply with Regulation D and failed to exercise reasonable care to assure that purchasers of the Purchase Agreements were not acting as statutory underwriters.

“The SEC alleges Telegram not only failed to take reasonable care, it actually paid others on a commission-basis to resell the Purchase Agreements. Telegram argues that, at most, Defendants paid certain non-U.S. persons a finder’s fee for helping to introduce Telegram to other non-U.S. investors. Another factual dispute, of course, is whether the Grams themselves are securities. I would be surprised if the court did not require Telegram to turn over the bank records the SEC seeks once the data privacy issues are addressed.”

Yesterday, Telegram posted that it is of the opinion that its tokens will be sufficiently decentralized and thus not securities.

The SEC’s case against Telegram contrasts with the Commission’s settlement with EOS/Block.one – another high profile crypto offering. Block.one, the creator of EOS, reportedly raised $4 billion USD through the sale of EOS tokens that began in June 2017 and continued for a year. Block.one settled with a virtual slap on the wrist $24 million penalty. Telegram, it seems, is willing to fight the feds.

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