Former SEC Enforcement Attorney Philip Moustakis Comments on Telegram Decision to Abandon Token Offering: Facts & Circumstances Rule

Earlier this week, it was reported that Telegram has decided to abandon its initiative to launch a blockchain platform called TON (Telegram Open Network) and a cryptocurrency named Gram. The decision was the direct result of an ongoing enforcement action launched by the US Securities and Exchange Commission (SEC).

In October of 2019, the SEC filed an emergency action and obtained a temporary restraining order against Telegram. In the filing, the SEC targeted two offshore entities that were said to have launched an unregistered, ongoing digital token offering both in the U.S. and overseas.

Between January and March 2018, Telegram reportedly raised approximately $1.7 billion from the future issuance of 2.9 billion Grams to 171 investors. Of this amount, $424.5 million was said to have come from 39 U.S investors.  Telegram did file a form D (506c) in 2018 indicating its intent to raise capital from accredited investors but the facts and circumstances of the offering indicated a violation of registration requirements of the federal securities law, according to the SEC.

In the blog post by Telegram creator Pavel Durov announcing the halt to TON and the issuance of Grams, he explained the dilemma as follows:

“Unfortunately, a US court stopped TON from happening. How? Imagine that several people put their money together to build a gold mine – and to later split the gold that comes out of it. Then a judge comes and tells the mine builders: “Many people invested in the gold mine because they were looking for profits. And they didn’t want that gold for themselves, they wanted to sell it to other people. Because of this, you are not allowed to give them the gold.”

If this doesn’t make sense to you, you are not alone – but this is exactly what happened with TON (the mine), its investors, and Grams (the gold). A judge used this reasoning to rule that people should not be allowed to buy or sell Grams like they can buy or sell Bitcoins.”

Durov slammed the court’s decision as an extranational act of enforcement that implies other countries “don’t have the sovereignty to decide what is good and what is bad for their own citizens.” Effectively, the US is deciding that Grams should not be distributed anywhere – not just in the US, explained Durov.

“This court decision implies that other countries don’t have the sovereignty to decide what is good and what is bad for their own citizens. If the US suddenly decided to ban coffee and demanded coffee shops in Italy be closed because some American might go there – we doubt anyone would agree,” stated Durov.

Durov is not the only critic of the SEC’s decision to pursue Telegram’s purchase agreement for cryptocurrency. The Blockchain Association filed an amicus brief in support of Telegram. Others have chimed in to support Telegram and the lawsuit is ongoing.

Crowdfund Insider decided to contact Philip Moustakis, counsel at the law firm of Seward & Kissel, who has been following the Telegram case closely.

Moustakis was previously a Senior Counsel in the SEC’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Moustakis’ tenure at the Commission included the beginning of the crypto boom – he was a member of the SEC’s Cyber Unit from its inception. While at the SEC, Moustakis initiated the SEC’s involvement in the cryptocurrency space with the SEC’s first Bitcoin-related enforcement action.

We asked Moustakis how Telegram’s decision to halt TON/Grams impacts the SEC’s case against the company:

“As a practical matter, the case will proceed as it had been.  In the SEC’s view, Telegram conducted an unregistered securities offering, a violation of the federal securities laws for which the SEC is seeking remedies, namely, a permanent injunction, disgorgement, and penalties.  If the SEC does not obtain a permanent injunction, there would be nothing to prevent Telegram from reversing course and, once again, seeking to issue the Grams,”  explained Moustakis.  “If the SEC simply dropped the matter, the programmatic impact on the industry of bringing the case in the first instance, to a considerable degree, would be lost.”

Asked about the criticism regarding the SEC’s decision to pursue a token offering that had yet to distribute anything, Moustakis said he does not believe it is fair criticism:

“The SEC is charged with safeguarding U.S. investors and capital markets.  And the SEC was not acting on an event that was yet to occur.  After all, Telegram raised $1.7 billion from its offer and sale of Grams, including $425 million from U.S. investors.  That’s not small potatoes.  True, there was a gap in time between the capital raise and the planned distribution of the Grams, that is, the tokenized representation of the investors’ secured interests in TON.  However, in the SEC’s view, that does not change the securities law analysis and, thus far, it seems the court agrees.”

The SEC’s action against Telegram stands in stark contrast to the enforcement approach taken against (EOS). In September 2019, settled an enforcement action with the SEC paying a $24 million civil penalty for allegedly conducting an unlicensed ICO (initial coin offering) crowdsale. raised about $4 billion in an offering. Thus, $24 million was peanuts. Some followers posited that perhaps the crypto was deemed sufficiently decentralized by the SEC.

The SEC's action against Telegram stands in stark contrast to the enforcement approach taken against Click to Tweet

Moustakis had this to say about the difference between the two actions taken by the SEC Enforcement Division:

“Each SEC settlement will reflect the underlying facts and circumstances​, as well as any litigation risk for the SEC, should the agency not settle and instead press its case in an administrative proceeding or a district court action. From the outside, we cannot know the pressure points in such settlement negotiations.  However, reading tea leaves, in the case of, there is the uncommon fact that the tokens offered and sold in the ICO [initial coin offering] became fixed and non-transferrable once the ICO closed.  The SEC may have felt that fact alone posed a significant litigation risk in terms of the securities law analysis. also took certain steps to block U.S. persons from participating in the ICO.  And, there was also the question of what assets the SEC could reach; was a Cayman Islands registered company with offices in Hong Kong.”

Attorney Philip Moustakis Comments on Telegram Decision to Abandon Token Offering: Facts & Circumstances Rule Click to Tweet

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