US Court orders Telegram to stop issuing GRAM crypto token

In a recent preliminary injunction, a US District Court has asked Telegram, a messaging platform, to refrain from issuing its GRAM crypto token. In a March 24 filing that granted the Securities and Exchange Commission’s (SEC) request for an injunction, the Court noted:

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 lawsuit between Telegram and the SEC has been going on since last October, following the 2018 initial coin offering (ICO) of the Telegram Open Network (TON). The SEC claims that under the 1934 Howey Test, such offerings constitute the sale of unregistered securities. In response to this, Telegram had said that before its offering, it had filed a Form D 506(c) Notice of Exempt Offering of Securities and was authorized to sell tokens to accredited investors. However, the Court concluded that since Telegram intended GRAM to reach the secondary market, it disqualified them from the 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 also rejected Telegram’s claim that the token would become a commodity once it is authorized and outside the purview of the SEC. 

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.

GRAM deliveries were also duly suspended:

The Court also finds that the delivery of Grams to the Initial Purchasers, who would resell them into the public market, represents a near certain risk of a future harm, namely the completion of a public distribution of a security without a registration statement. An injunction, prohibiting the delivery of Grams to the Initial Purchasers and thereby preventing the culmination of this ongoing violation, is appropriate and will be granted.