Author: Scott Kupor
Translation: Zoe Zhou
Many people in the crypto community and other fields have been closely following the SEC's allegations of Telegram, which they believe is another regulatory test for the blockchain space. In a petition filed with the Federal Court in October 2019, the Securities and Exchange Commission stated that Telegram's sale of approximately 2.9 billion digital currencies ("Grams") violated the Securities Act of 1933.
- U.S. court extends Gram token sales ban, promises end-of-April verdict
- Telegram says recent ruling "fundamentally" overturns SEC ban
Extending from encryption to broader issues
The biggest question in this case is whether the things that were initially sold under the "securities" contract were "securities" after the sale. In this case, the "securities" contract was a digital currency purchase agreement (a commitment to deliver tokens in the future) that was sold to investors via Telegram before the network was released. That is, when the network is launched, the digital currency that is the basis of the initial investment contract can be traded on the network; or, more broadly, if the company ceases to exist, (in the case of complete decentralization) the network can still Does it still exist?
But the wider concern is whether Telegram has "financed", which has implications for other industries including digital currencies.
How did that happen?
First of all, some basic knowledge needs to be understood. In the United States, securities can only be sold if they are registered with the Securities and Exchange Commission or meet the conditions for exemption from registration. A typical example of a registered offering is an initial public offering (IPO)-the SEC reviews the information that a company discloses to potential buyers and imposes a series of continuous financial and operational information disclosure requirements on the issuer to protect the open market investor.
The most obvious example is a due diligence conducted by a venture capital firm for Company X's Series A financing. The venture capital company signed a series of legal contracts with company X, which defined the company's rights and restrictions, and remit money to company X. As a result, the company was able to purchase Series A preferred shares of Company X. This is a typical process where a company sells unregistered securities to investors privately.
Why is this important?
This is a common law born in the 1970s. This rule has always been an important factor in the rise of the venture capital industry, which has spawned many important companies, which in turn has created employment and economic growth …
Instead, the SEC stated in an initial lawsuit that private institutional investors who signed a Telegram purchase agreement (sold privately as securities under appropriate regulatory regulations) did so to distribute digital currency to unsuspecting investors. Rather than through an orderly sale to qualified investors who meet the requirements of the US Securities and Exchange Commission Reg.D to register for exemption before applying.
In a legal sense, the SEC means that these investors are actually "underwriters", that is, intermediaries that buy Grams, whose purpose is to sell Grams or its underlying assets to an unsuspecting public. This not only contradicts the regulatory requirements established around Regulation 144 over the past 50 years, but also questions the nature of the purchase of private securities and the possibility of resale of these securities in private or public markets.
So why should we care about these? Because if the SEC's explanation is established, buyers of non-publicly issued securities can be considered underwriters. This has two major effects:
- First, traditional underwriters (such as investment banks) may be held liable for any material misstatements or false statements made by the securities issuer. This is reasonable under the traditional underwriting model, because underwriters pay a certain fee when selling and selling securities—they are responsible for ensuring that information is fully and appropriately disclosed to buyers. However, according to the SEC's interpretation of the Telegram case under Regulation 144, any buyer of private securities will now be considered an underwriter. It may therefore be liable for the issuer's misconduct. This could mean that the buyer of the securities could theoretically sue another buyer for the bad behavior of the issuer / seller. This is obviously unreasonable.
- Second, if the buyer is considered an underwriter, they may not be able to resell the legally common exemption for the security in the future. This is because in the Telegram case, although the case met the holding period stipulated in Regulation 144, the SEC's vision of a profitable sale was equated with an intent to sell to an unsuspecting public, so this was not allowed. Similarly, people will come to a strange conclusion: if people are unable to sell securities in the future when they comply with current laws and regulations, why should they buy securities?
If policymakers want to change the process of private enterprise financing and create businesses that can create value in other ways, they should respect normal rulemaking and legislative procedures, rather than seeking to change policy through enforcement action.