Babbitt column | SEC's supervision on the sniper war against Telegram

The author presses: " Encrypted version of WeChat" Telegram has recently been attacked by the SEC, stating that SAFT is not a talisman, and whether the token constitutes a security has nothing to do with it . The SEC 's regulation has been online, and the project side is actively or proactively cooperating with the SEC to explore the boundaries of innovation and compliance.

The US Securities and Exchange Commission (SEC) has always kept a close eye on ICOs that occur in the United States or against US nationals, regardless of the size and impact of the project, whether or not a future token simple agreement is used at the time of pre-sale of the token ( In the form of agreement, such as SAFT), has Form B been submitted to the SEC, and whether the token has certain functions of use, as long as the relevant token is not registered with the SEC and may be suspected of harming the interests of investors, it may be investigated by the SEC. .

Recently, the SEC, which has just reached a settlement agreement with EOS issuer Block. One, has successfully launched the Telegram Open Network (TON) main network developed by Telegram in the encrypted instant messaging application. At the end of this month, a large number of Gram tokens were released into the United States. Before the market, it made a steady, accurate, and embarrassing regulatory punch – filed a lawsuit in the US federal court, claiming that it violated the provisions of the US Securities Law, and publicly issued securities tokens without registration, requiring the court to issue Temporary and permanent injunctions are ordered to stop violating securities laws, prohibiting them from participating in the issuance of digital asset securities, and requiring them to return illegal income and interest to investors and pay civil penalties.

First, the distribution of Gram

Early release

According to the SEC's complaint [1] and related public information, in January 2018, Telegram Group Inc., its wholly-owned subsidiary TON Issuer Inc. (collectively “Telegram”) signed the “Gram Purchase Agreement” with relevant investors. After the TON development goes online, Telegram will issue the tokens called “Gram” to the investors, and the investors will purchase the tokens at the agreed fixed price; the main online line and token delivery will not be the latest. Later on October 31, 2019, Telegram will need to compensate investors for investment losses.

From January to March 2018, Telegram conducted the following two issues, selling a total of approximately 2.9 billion Gram, raising a total of 1.7 billion US dollars, and participating in the issuance of a total of 171 investors, including 39 US investors , subscribed for more than 1 billion Gram, totaling $424.5 million:

> First release

In January 2018, Telegram sold approximately 2.3 billion Gram under the Securities Act of 1933 (Rule 506(c)) and/or Regulation S, at a price of $0.37 each, raising approximately $850 million. Form D was submitted to the SEC.

> Second release

In March 2018, Telegram again sold approximately 639 million Gram under the Securities Act of 1933 (Rule 506(c)) and/or Regulation S, at a price of $1.33 each, raising approximately $850 million. And submitted Form D to the SEC.

2. Main online line and token distribution

In March 2019, the TON test version was launched, and the wallet was recently launched. Investors can provide Telegram with the address of receiving Gram from October 2nd to 16th.

Before October 31, 2019, Telegram's TON main network will be launched, and Telegram will issue Gram to investors in the previous two issues, with a reference price of $3.62 per Gram.

At the same time as the TON main online line and the two investors who issued Gram, Telegram will additionally reserve and transfer millions of Gram to Telegram developers, TON product developers, users, etc. For the issuance and processing of coins, Telegram did not submit a securities registration application to the SEC.

Second, the main complaints of the SEC and the author's observation


1. Gram is of the same nature as the Gram Purchase Agreement – both investment contracts and therefore securities

Telegram believes that the Gram Purchase Agreement constitutes an investment contract and is a security; but Gram is a currency that can be used as a medium of exchange for goods or services and does not constitute securities.

But the SEC's opinion is at odds with Telegram. They believe that the ecology of TON has not been established so far, and no goods or services can be purchased with Gram. Gram does not have the function that Telegram claims to be able to purchase goods or services, not money. Given that the return on the return of Gram's investors depends on the operational or management efforts of the Telegram project, Gram meets the standards of the Howe test and therefore constitutes an investment contract and is a security.

Based on the above, the author understands whether the token constitutes a security, whether it has adopted a pre-sale agreement such as SAFT before the token is generated, whether it has complied with the regulation D, or not, mainly depends on the function and use of the token itself, the SEC will The nature of the token is determined according to the securities law and the existing “analysis framework for digital asset investment contracts” [2] .

The main reason for the pre-sale agreement such as SAFT that appeared and prevailed in the ICO boom was that its designers claimed that through such arrangements, it would be possible to avoid the registration of SEC securities in future token issuance, but its legitimacy and effectiveness were born. From day on, there is much controversy. In this regard, the SEC did not positively affirm or deny, but has always held a regulatory attitude through the phenomenon (agreement) to see the substance (substitute function). The SEC clearly stated its "Gram Presale Agreement" in the Telegram indictment. And the nature of Gram's view, by way of example, shows that SAFT and other arrangements are not exempting the future amulet from issuing or delivering registration. If the token itself lacks practical functions and has the characteristics of securities, the use of SAFT may be safe for a long time and it is difficult to ensure safety.

2. Issuance and distribution of Gram does not apply for exemption

(1) Issuance of Gram does not apply for exemption

In the initial release, Telegram set a restricted period for investors to resell through smart contracts – investors are in the 3 months, 6 months, 12 months and 18 months after receiving Gram, each During the period, only 25% of the amount of tokens held by the company can be transferred; in the second issue, there is no restriction on the investor.

Due to Telegram's restrictions on the sale of Gram does not meet the requirements for the registration of exempted securities – most of Gram can be resold immediately after issuance, there is no restriction on the sale; some Gram does not meet the requirements for the limited time limit despite the limited sales requirements. Therefore, the SEC believes that Gram does not meet the conditions for exempted securities registration, and Telegram has not applied for securities registration so far, thus violating US securities laws.

(2) Exemption from exemption for the distribution of Gram

The SEC believes that the issuer's distribution of securities in public offerings, as a process of allocating securities to investors, is subject to the relevant provisions of the Securities Act, unless it constitutes an exemption under Article 4 of the Securities Act. SEC registration.

3. Telegram ’s illegal consequences are serious

(1) SEC petition

The SEC’s recent penalties for Block. One’s violation of tokens only involved civil penalties, and did not require it to register or apply for exemption from registered securities, nor did it take other action.

But the SEC's attitude toward Telegram does not seem so tolerant. From the SEC's complaint, Telegram may not have paid a fine, returned illegal income and interest, applied for registration of securities, and may be prohibited from participating in the issuance of any digital asset securities in the future. In addition, with regard to the release of Gram, whether Telegram can finally obtain the SEC's release through the remedy of applying for registration of securities is still a question mark.

The author understands that if Telegram wishes to correct it, it may be a way out to apply for public offering of securities under Regulation A+. However, as the author has previously published in the case of Blockstack and YouNow, the use of the regulations A + issued securities tokens (see "Revelation of STO compliance issues under Reg A+" /article/401514 , and "Another example of a STO application under RegA+, what is the difference this time?" ), going on this road will face A number of compliance issues need to be resolved, which may have a major impact on the schedule of the main online line scheduled by Telegram, the redemption of existing investor token commitments, and the existing exit arrangements of existing investors.

(2) Investor's claim

The author understands that no matter how the dispute with the SEC is resolved, if Telegram cannot distribute Gram to investors on time according to the agreement of the Gram Purchase Agreement, it may also default on the investor. If the investor makes a claim under the agreement, Telegram may be liable for the relevant breach of contract.

4. SEC regulatory trends

For the chaotic growth of various tokens, the past SEC is mostly after-the-counter accounting, but lately, with the accumulation of regulatory experience, the formation of relevant regulatory frameworks, and increased awareness of project-side compliance, regulation has become more and more Moving forward, regulation in the event (such as token distribution for Telegram) and ex ante regulation (such as token distribution for Blockstack and YouNow) are strengthening, and the SEC is working with the project side (whether the project is active or passive) And explore the boundaries of innovation and compliance.

Author: Zhang Ling, a partner at law firm Han

Disclaimer: This article only represents the author's personal opinion and does not represent the opinions of the organization. The contents of this article do not constitute legal advice and investment advice. To reprint or cite any of the content in this article, please include the author's name.

1. The announcement and indictment of the SEC can be found at .

2. For the full text of the “Digital Asset Investment Contract Analysis Framework”, please see .