Close to the line still can not escape the SEC's lawsuit, what exactly did Telegram do wrong?

The US Securities and Exchange Commission (SEC) today announced a lawsuit to block Telegram (Telegram) and Ton from issuing money, which described the act as "issuing illegal digital asset securities Grams."

Gram will be the original token used on the Telegram blockchain, but the SEC says they have no application at all and are securities subject to US securities law registration requirements.


Telegram ICO has raised a large amount of funds and is one of the most concerned projects, and the SEC lawsuit has caused considerable obstacles.

In addition, the SEC issued a temporary restraining order against the company, which prohibits it from continuing to offer or sell Gram to anyone. The SEC stated in the lawsuit that Telegram "committed to inject billions of Grams into the US capital market by October 31." It is expected that the hearing on this lawsuit will be held on October 24, 2019.

Through SAFT (Future Token Simple Agreement), Telegram raised $1.7 billion from 171 initial buyers. They allegedly used these funds to “capitize their operations and fund their blockchains (ie, the TON blockchain).

The SEC said that $424.5 million in sales came from US investors, and the defendants will sell more tokens to the American public. According to the SEC, this violates the registration requirements of the Securities Act of 1933, so they have the right to immediately issue injunctions, fast forensics, return of illegal income, prohibit them from selling or distributing more Gram, and impose civil fines.

Steven Peikin, head of the SEC enforcement department, said:

“We have repeatedly stated that issuers cannot circumvent federal securities laws by simply labeling their products with cryptocurrencies or digital tokens. Telegram's goal is not to comply with long-standing responsibilities to protect investors' disclosure obligations. Next, get benefits from public offerings."

Why do you want to file a lawsuit in the federal court?

The lawsuit was filed in the US federal court, not an administrative lawsuit. The reason for this may be that Telegram refused to accept a subpoena from the SEC. If so, it is not surprising that the SEC will go to the federal court for help.

According to at least one Telegram investor, the company believes they can avoid the SEC by making the company more "decentralized." However, today’s lawsuits and injunctions indicate that this is not the case. Federal judges have more direct original power than administrative law judges, and can also issue decisions that set a precedent for other cases.

The investor (US resident) said on the phone that he expects the SEC's actions will cause his token to lock up for a longer period of time. He predicts that transactions will not be affected in the United States, but it is also recommended that Telegram can follow the steps of Blockstack and register as a security under the Reg A+ rules. Blockstack chose to use Reg A+ for discretion, although its executives have said they see their tokens as a utility.

In any case, investors expressed disappointment at the SEC's actions that hindered technological innovation.

Why is the SEC not happy?

The problem is that the SEC believes that Gram itself is a security. There are many reasons for them. One of them is that buyers and follow-up investors are looking to profit from Telegram's work. No products or services can be bought with Gram.

The SEC found a bigger problem, and Telegram promised to issue coins before October 31, while hoping to sell more. But the company has never registered Gram as a planned issue of securities, but also intends to hang on the cryptocurrency exchange.

In short, “Once these resales (secondary market transactions) occur, Telegram will complete its unregistered securities offerings and make billions of Gram transactions to the investor community on multiple platforms.”

The SEC pointed out that once tokens are listed on the open market, it is "substantially impossible to lift these transactions" given the existence of "various unregulated markets." This is another reason why the SEC is taking action.

The correct usage of SAFT, what did this case tell us?

There seem to be two problems here. First, the SEC is trying to prevent Telegram from offering Gram to US investors in the US, and is unable to allow Telegram transactions to move toward a difficult step. Second, the SEC simply does not believe that the SAFT agreement is an investment contract.

In short, like Telegram SAFT, according to SEC analysis, these tokens are themselves investment contracts, provided they meet the Howey test. This is the position of the SEC – some believe that this will cause heated debate and may soon lead to more problems related to token cases.

In other words, the use of SAFT itself does not guarantee whether the tokens delivered later will be securities. The lawsuit reminds people that the SEC will independently analyze the purpose, function and application of tokens in the future. Only an investment contract based on the Howey test will be considered an investment contract. Those who believe that SAFT means immunization against securities laws are now very wrong.

Is this related to today's joint statement by SEC, FinCEN and CFTC?

Although it is difficult to judge whether this is a coincidence, the lawsuit and the Bank Secrecy Act's joint policy statement on anti-money laundering and counter-terrorism reporting and compliance requirements for the digital asset industry were submitted on the same day. The lawsuit also pointed out that the release of Gram was to prevent Telegram from obtaining KYC and AML information from future users. And the SEC said "it is impossible to determine whether the identity of the user of the secondary market trading Gram can be ascertained."

Why does the SEC want to sue Telegram, but choose to reconcile with

Although we can't have telepathy with the regulator, it seems that has negotiated with the SEC and the tokens sold to US users may be much less. In addition, they replaced the ERC-20 token at ICO with a local token that could be used on the EOS blockchain. If Telegram really ignores the SEC's subpoena and plans to sell the hundreds of millions of dollars of Gram tokens to the US exchange later this month, the situation may be slightly different.