Telegram vs. the SEC: Telegram's Response

Alan VanToai
October 30, 2019

Last Friday, just 2 weeks before the launch deadline of Telegram’s highly anticipated $1.7 billion Telegram Open Network (TON) blockchain, the SEC filed an emergency action halting the launch and distribution of the TON token, Gram.

In the emergency action, the SEC alleges that Telegram’s $1.7 billion private presale of Gram and impending token distribution were in violation of securities laws, and compelled Telegram to halt the launch of the blockchain, turn over significant data and details around the token sale and Telegram operations, return all funds to the investors (with interest), and pay a penalty to the SEC for violating securities law.

On Thursday, October 17, Telegram filed their official response to the SEC’s complaint via their retained counsel Skadden Arps, providing additional details that paint the allegations and actions of the SEC in a different light.

Inside Telegram’s Defense

Over the last 18 months, in a self-imposed effort to be compliant with SEC regulations, Telegram had been voluntarily engaging with and soliciting feedback from the SEC regarding the TON Blockchain and Grams.

Voluntarily, the defense states, Telegram:

  • Produced thousands of pages of documents and communications with U.S. purchasers,
  • Submitted five detailed legal memoranda regarding the securities questions at issue,
  • Participated in three in-person presentations during which it answered hundreds of questions and requested feedback,
  • Regularly engaged in email and telephone discussion regarding a wide range of topics relating to the TON Blockchain an Grams, and
  • Made modifications to the technology and operation of the TON Blockchain in response to the SEC’s stated concerns.

During the 18 months through which Telegram was voluntarily engaging with the SEC (and despite the SEC knowing about the October 31, 2019 launch-or-die deadline), the SEC:

  • Never requested that Telegram delay the launch of the TON Blockchain,
  • Never advised Telegram of its intention to seek injunctive relief, and
  • Waited until the 11th hour to file an ex parte application to enjoin Telegram’s Launch

Adding insult to injury, Telegram, in response to the SEC’s Friday complaint, proposed to voluntarily delay the launch of TON and distributions of Gram (effectively achieving the same practical result as an injunction) until the court can resolve the legal issues at the hear of the matter.

The SEC refused the offer, insisting instead on a broad and burdensome “'emergency discovery’ despite the absence of any emergency”.

Telegram: “Grams are not currency"

Placing the SECs (questionable) actions aside, Telegram’s response goes on to make their case against the SECs (“fundamentally flawed”) position that Grams are securities.

In their defense, Telegram doubles down on their position that Grams are not securities, but instead “merely… a currency or commodity (like gold, silver or sugar)… once the TON Blockchain launches.”

Telegram distinguishes the Grams themselves from the purchase contracts - which were "private purchase agreements with a limited number of highly sophisticated purchasers… providing for the future payment of a currency but only following the completion and launch of the TON Blockchain.”

The SEC’s “Broad And Overly Burdensome” Requests

Alongside Telegram’s 6-page official response, Telegram appended 40 pages of disclosures including email correspondence, proposed agreements, and the list of documents the SEC is requesting from Telegram:

Next Steps

Telegram closes its response with a request to the Court to deny the SEC’s request for a preliminary injunction, and enter instead into an order that:

  • Temporarily halts the TON launch (while not killing it outright),
  • Relieves Telegram of its obligation to produce the overly broad and burdensome documents and witnesses, and
  • Expedites the process in which the parties work resolve the legal issues underpinning the SEC’s claims.

A Court hearing is scheduled in the Southern District of New York  for October 24, during which the Court will decide on how the case will proceed.

The core issue - whether or not Grams are a security or a currency - will be resolved over the next few months.

More urgently, Telegram and the SEC will each make their case for whether or not an injunction (effectively killing TON) is necessary, and whether or not Telegram will be obligated to produce the documentation listed above.

We’ll continue to follow this story and will be publishing updates as they emerge.

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Alan VanToai
Co-Founder of Telefuel
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