SEC’s Letter to Judge Castel hints that Telegram is seeking an End-Run around the Rules

In a letter to Judge Castel dated October 17, 2019, the U.S. Securities and Exchange Commission (“SEC”) responded to Telegram Group Inc. and TON Foundation Inc. (collectively “Telegram”), the SEC explained why Telegram’s Opposition to the SEC’s Emergency Application for Preliminary Injunction is just an attempt to skirt the rules.

The Court should grant the SEC a Preliminary Injunction or Extend the TRO and Conduct a Preliminary Injunction Hearing. First, Telegram previously violated Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”) when they sold their cryptocurrency, or Grams. Second, the SEC points out that Telegram maintains that their conduct was blameless, seeking to instead blame the SEC for the way it conducted the investigation of Telegram’s conduct. For these reasons, despite the fact that Telegram promised that it would not offer, sell, deliver or distribute Grams, the SEC believes that future violations of the federal securities laws are “virtually guaranteed.”

The heart of the SEC’s claim is that a past violation of Section 5 occurred when Grams were sold in 2018. Any offer or sale of securities must be registered, exempt from registration or else it is illegal. Telegram claims that Grams will merely be a currency or a commodity and therefore not a security once the TON Blockchain launches, however, this is irrelevant. It doesn’t matter what Grams will be in the future. It matters that they were securities when they were offered and sold in 2018.  Grams were sold without registration or an application exemption from registration. Therefore, the offer or sale of Grams in 2018 was illegal. This clearly explains why the SEC claims that distribution of the securities would also be illegal.

The SEC is willing to work with Telegram to address concerns that discovery requests are too burdensome. The SEC is amenable to a speedy resolution of the merits of the litigation, however, Telegram needs to play by the rules of the road rather than seeking an end-run around the rules.

Some of the questions I have are the following:

How much will it cost the SEC to pursue this litigation? What is their chance of success? Is the SEC entitled to recover attorney’s fees?

Please email me if you have any questions or leave a comment below!