Telegram has been engaged in an ongoing battle with the Securities and Exchange Commission (SEC) regarding the sale of GRAM tokens – an offering that raised $1.7 billion. The legal fisticuffs kicked off last October when the SEC filed an emergency action and obtained a temporary restraining order against Telegram. In brief, the SEC alleges an unregistered digital token offering in the U.S. and overseas.
Telegram recently asked the court not to allow a preliminary injunction to reach “Initial Purchasers” who are not U.S.-based because it would result in the extra-territorial application of the U.S. securities law. The court denied this request as the tokens are designed to be held anonymously and Telegram could not truly guarantee secondary transactions would not be available to US investors.
The Blockchain Association is a lobbying group that has the support of multiple, high profile digital asset firms like CoinList, Coinbase, Toro, Ripple and more.
In the brief, the Blockchain Association claims the district court is in error and it conflated “Telegram’s private placement and the future sales of blockchain tokens in its decision to temporarily block the distribution of Grams while the SEC’s lawsuit against Telegram is pending.”
While the Blockchain Association agreed with some of the court’s opinions, the group said the “district court erred by conflating Telegram’s private placement investment contract with the underlying token.”
To quote the amicus brief:
“The Chairman and the Director of Corporation Finance have both acknowledged that a digital asset “can evolve toward or away from a security.” De, infra n.10. Contrary to the district court’s static approach, “[j]ust because [a particular instrument is] a security today doesn’t mean it’ll be a security tomorrow, and vice-versa.” Id.; see also Hinman, infra n.8. Accordingly, the agreements at issue promised to deliver tokens to accredited investors only once those tokens could be exchanged on a network that is functional, decentralized, and therefore outside the Commission’s own understanding of a security. The investment contract and the underlying asset are distinct. “Conflating the two concepts,” as one Commissioner anticipated, “has limited secondary trading and has had disastrous consequences for the ability of token networks to become functional.” Peirce, infra n.13.
Because of the district court’s error, the entire blockchain industry may no longer rely on long-standing exemptions that remain available to all other market participants. And the decision below left the industry without any clear indication about when complying with existing law amounts to an unlawful “scheme” under Howey. Given these far-reaching effects, the Blockchain Association respectfully requests that this Court reverse the ruling below and hold that existing law and Commission guidance properly treat a private-placement contract as distinct from the asset supplied under that contract.”
The debate is of importance as any decision may impact the entire digital asset sector in the US. As the court may be the first to decide under what circumstances a digital asset may be considered a security, the ramifications are profound for blockchain innovators.
The Blockchain Association posits that the SEC has provided limited guidance but what guidance it has issued conflicts with the enforcement action being taken against Telegram.
The Blockchain Association amicus brief is below.
The court’s recent decision is available here.
Blockchain Association 2020.04.03 Amicus Brief Blockchain