U.S. District Court for the Southern District of New York verdicts in favor of the Securities and Exchange Commission (SEC) in the ongoing messaging service Telegram versus the Securities and Exchange Commission legal battle. Judge Kevin Castel of the District Court granted an injunction against Telegram, prohibiting it to further issue Gram tokens.

As per the ruling now, the sale of Gram tokens has temporarily been restricted which is a big blow for the Telegram Group.

The SEC had issued the temporary restraining order against the sale of Telegram’s Gram token back in October 2018 which had been challenged by the Telegram in court. Telegram’s tokens were allegedly offered to the investors as unregistered security which was claimed to be a breach of Securities law as per SEC.

In the Judgment, Judge P Kevin Castel has admitted that Gram tokens were sold as unregistered security violating the US Securities Law.

What does the Judgment read?

The judgment stated, “The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts understandings at issue, including the sale of 2.9 billion Grams to purchasers in exchange for $ 1.7 billion, are part of a large scheme to distribute those Grams into a secondary Public market, which would be supported by telegrams ongoing efforts. 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."

SEC versus Telegram legal battle

The trial between the Securities and Exchange Commission (SEC) and Telegram had been started in October 2019. The SEC had temporarily restricted Telegram’s Gram Token which was scheduled to be launched in October 2019. SEC considered it as security and was forcing the Telegram to follow the securities law. Whereas the Telegram had challenged the SEC's mandate and also denied to disclose the financial information of the company.

By selling the Gram tokens, Telegram has raised $ 1.7 billion, which the SEC considered illegal since the Gram token has not been registered at SEC as securities and allegedly the investors were not made aware of the financial status of the company.

Telegram had been claiming Gram tokens as a cryptocurrency and not a security and thus it was defending that it has not violated the Reg. D securities’ regulations. Telegram has consistently been accusing that SEC did not provide clear regulations and also condemned it for publicly unveiling the communication between Telegram officials and its private investors publically.

SEC’s recent Monitoring and Enforcement against Crypto Firms

SEC has been strictly monitoring crypto-based companies in recent years. Among others, Telegram is one of the biggest blockchain company which it has targeted recently for allegedly violating the Securities law. Another messaging app Kik has also been sued by the SEC for violating the Securities Law. As per SEC, Kik has sold its tokens as an investment opportunity, while Kik defended that the ICO was for currency and not used as an investment opportunity as per Securities law.

Now that Telegram has lost another round against SEC, Kik still continues to fight the legal battle against SEC denying its accusations.

While SEC has been restricting the crypto firms, one of the SEC commissioners Hester Pierce has been trying to bring in safe-harbor provisions for crypto companies that can benefit Telegram as well.

Jayashree Ingle

CBW - External Analyst

INDIA