Telegram insists that Gram is not a security, former SEC legal counsel: this is just a struggle

Telegram today responded to the allegations of $1.7 billion in token sales in 2018 that violated US securities laws, responding that its "Gram" token was not a security. On the other hand, the company said in a document submitted to the Federal Court of Manhattan that the “purchase agreement” they signed with investors was a security.


The US Securities and Exchange Commission (SEC) recently ordered the encrypted communications company to suspend upcoming tokens in an "emergency" lawsuit. Telegram originally planned to distribute its pre-purchased $1.7 billion "Gram" token to investors on October 31, but an injunction led to the plan being shelved.

These tokens are pre-purchased, and they promise that Telegram will go online with a fully functional blockchain platform TON before the end of October. If this is not possible, investors will receive a full refund. So the SEC's injunction is a big problem.

Telegram is now taking a bite. In a motion to the Southern District Court in New York, the company argued that their contract to sell tokens, the Future Token Simple Agreement (SAFT), was a supply of securities that enjoyed a “effective exemption”. They insist that Gram itself is not a security: that is, they are more like Bitcoin and Ethereum, and regulators temporarily view them as "bulk commodities."

Telegram also revealed that it regularly “contacts” with regulators, stating that this sudden prosecution “is clearly intended to gain strategic litigation advantages” (ie, when TON blockchain is not online yet, Gram cannot be used for any internal services) . The SEC stated in the indictment that Telegram did not respond to the subpoena issued during the investigation. Part of the reason for submitting the application today is to let the court reject the subpoena.

However, former SEC legal adviser Philip Moustakis said in an interview that in any case, the argument that "Gram is not a securities" may be frustrated. Moustakis was the first to file a lawsuit against a Bitcoin-related company. He said that although Telegram believes that tokens exist for internal use, it is not a marketable security, but the application does not currently exist. This is meaningless.

“In the allegations against Telegram, the SEC stated that there is no difference between the Gram offering and the Gram token. Instead, the SEC considers this to be a traditional fundraising act because the company uses the funds raised to operate and build it. Network. Gram can't be used for any goods or services, and once the company has successfully made its promised features, Gram buyers have every reason to expect to share the benefits."

“In the case of airline miles, for example, a newly established airline can pre-sell airline miles through an airline mileage purchase agreement to raise funds to support the company’s development. These funds can be used to purchase aircraft, maintain operations, and establish routes. Hiring employees. Then, once the airline starts operating, the pre-sale miles sold in the purchase agreement can be delivered to those who purchased the miles, which can be used to purchase tickets, or to pay for baggage, or for purchases. Inflight entertainment."

"But this example is different from Telegram's behavior. According to SEC's allegations, Telegram's pre-sold tokens are speculative investments in Telegram's network development. These tokens will be distributed regardless of whether Telegram is likely to succeed in the future. It seems that there are no planes or airlines in operation."

The SEC’s lawsuit against Telegram is a blow to the second high-profile cryptocurrency crowdfunding in the past month. What are the standards of US regulators? We may be able to find some rules from it.

The last one to be sued by the SEC was, which raised $4 billion in funding in 2018. It was also alleged to issue unregistered securities, but with a clever legal basis, the company ended up with a $23 million fine.

But many people think that is not penalized, and that the rules governing crowdfunding mechanisms are outdated. The SEC uses a three-step rule of thumb, the Howey Test. According to the Howie test, if "one invests money in a common business and is implied to profit from the efforts of the sponsor or a third party," the test will determine that the asset is a security.

Industry insiders, including Kik's CEO, have begun calling for a replacement for the Howie test, taking into account the differences in encryption assets.

Moustakis said that this approach is wrong. He said that in essence, the transaction is still the same, just using a newer technology. “Second securities used to exist in paper form, and now we can buy securities online,” he said. “Now from the Internet to the blockchain, why do the rules change?”

Moustakis explained that the SEC's role is to protect investors, and the technology involved in a particular transaction is not important. “When people say, 'We need a new Howie test,' they mean, actually, 'We need new laws.'”

Moustakis said that if Telegram loses in court, it may face two types of civil penalties: one is to recover funds, which will force the company to waive its illegal income; the other is to abolish the agreement, which will give investors Opportunity to return the token and recover the loss.

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