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The court said that since Telegram was planning to sell its TON tokens in the secondary markets, they shall be categorized as unregistered securities under the Howey Test.
The plan for the issuance of Telegram‘s Gram tokens has hit yet another roadblock recently. Upon special request by the Securities and Exchange Commission (SEC) a U.S. Court has asked the messaging platform Telegram to refrain from its token issuance process scheduled next month.
On Tuesday, March 24, U.S. District Judge P. Kevin Castel, of the Southern District of New York, said that SEC has a plausible accusation of Telegram selling unregistered securities. Besides, the judge also mentioned that Telegram’s $1.7 TON token sale resembles a structure that maximizes purchasers’ profit upon sale. In an official statement by the judge, he wrote:
“The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts”.
The judge further spoke on the merits of the Howey Test created by the U.S. Supreme Court in 1946. The Howey Test determines if certain transactions qualify as investment contracts and subject to securities laws. The judge wrote:
“Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement”.
Hostility between Telegram and SEC, Court Involvement
In October 2019, Telegram locked horns with the SEC as the securities regulator halted the messaging giant from conducting its token sale. The SEC then said that the sale of TON tokens in 2018 qualify for unregistered securities under the Howey Test.
Telegram countered SEC’s decision saying that even before the first token sale it had filed a Form D 506(c) Notice of Exempt Offering of Securities. Thus, it claimed that it was authorized to sell its tokens to accredited investors. But the court said that since Telegram intended of selling these tokens in secondary markets, they can get any special exemption.
“Telegram’s sale of Grams to the Initial Purchasers, who will function as statutory underwriters, is the first step in an ongoing public distribution of securities and, as such, Telegram cannot receive the benefit of an exemption from the registration requirement under either section 4(a) or Rule 506(c).”
“The Court rejects Telegram’s characterization of the purported security in this case. While helpful as a shorthand reference, the security, in this case, is not simply the Gram, which is little more than alphanumeric cryptographic sequence. Howey refers to an investment contract… that consists of the full set of contracts, expectations, and understandings centered on the sales and distribution of the Gram. Howey requires an examination of the entirety of the parties’ understandings and expectations,” wrote the court in an additional statement.