Securities and Exchange Commission v. Telegram Group Inc., No. 19 Civ. 9439 (S.D.N.Y. filed Oct. 11, 2019)

On October 11, 2019, the SEC filed an emergency action in the U.S. District Court for the Southern District of New York against Telegram Group Inc. and a wholly-owned subsidiary for violation of Sections 5(a) and 5(c) of the Securities Act for the sale of unregistered securities. The SEC sought and obtained a temporary restraining order to prevent Telegram from issuing tokens in an ongoing offering that had raised more than US $1.7 billion to date. In addition, the SEC sought a preliminary injunction barring distribution of Telegram’s digital currency, disgorgement of ill-gotten gains with prejudgment interest, an order prohibiting defendants from participating in any offering of digital asset securities, and a monetary penalty.

Telegram is a company that owned and operated the mobile messaging application, Telegram Messenger. Between January and March 2018, Telegram allegedly conducted an ICO for its token called “Grams” to raise capital and finance its blockchain, the “Telegram Open Network” or “TON Blockchain.” Telegram allegedly sold 2.9 billion “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers, and allegedly raised approximately $1.7 billion. Telegram allegedly promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, and also allegedly planned on selling millions of additional Grams at that time. Purchasers and Telegram then allegedly would be able to sell the Grams in the United States.

The SEC alleges that Grams were unregistered securities because: (1) Telegram represented that it would pool the proceeds from the Grams to finance the company and develop additional products; (2) Telegram advertised the experience and skill of its employees in building the TON Blockchain; (3) Telegram claimed that there would be a trading market for Grams; and (4) there was no available use for the Grams at the time of the ICO other than as an investment vehicle.

Telegram filed an answer to the complaint on November 12, 2019, asserting a counterclaim that “the SEC has failed to provide consistent and meaningful guidance on whether and how it will regulate cryptocurrencies like Grams. Moreover, the SEC never provided fair notice that it believed Telegram’s actions had violated and would violate the federal securities law, even as it knew Telegram was expending significant time and resources, including investor funds, to prepare to launch the TON Blockchain and Grams.”

Download PDF