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Telegram Accuses The SEC Of Failing To Provide Clear Guidance And Engaging In Improper Regulation By Enforcement

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On November 12, 2019, Telegram Group Inc. and TON Issuer (Defendants) filed a response to the U.S. Securities and Exchange Commission (SEC) complaint originally filed on October 11, 2019.  Not surprisingly, Defendants deny all allegations in the SEC complaint. 

According to the response, Defendants mainly rely on the following three arguments:  

  1. Defendants conducted a private placement pursuant to valid exemptions to registration;
  2. The SEC has failed to provide necessary clarity and notice regarding the securities law violations alleged, which has led to arbitrary enforcement; and
  3. The SEC failed to provide guidance when Telegram was expending funds to build the TON Blockchain. 

You can read my previous blawgs on this topic by clicking here, here, here and here.

Defendants make the following points in response to the SEC Complaint:

  • Defendants conducted their private placement to highly sophisticated, accredited investors pursuant to valid exemptions to registration under the federal securities laws.
  • Defendants’ cryptocurrency, Grams, will not be securities when they are created at the time of launch of the TON Blockchain.
  • The SEC has engaged in improper “regulation by enforcement” in this nascent area of the law.
  • The SEC has failed to provide clear guidance and fair notice of its views as to what conduct constitutes a violation under the federal securities laws.
  • The SEC has adopted an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of its own high-ranking officials. 
  • The SEC and Defendants were in regular communication over the past nearly two years, during which time the SEC failed to provide meaningful guidance prior to bringing an enforcement action.
  • Grams do not exist yet but if and when they do, they will constitute a currency and/or commodity – not securities under the federal securities laws. Therefore, Grams are not required to be restricted, contain restrictive legends or be subject to certain lockup provisions. 

Defendants’ set forth the following Defenses

  • Constitutional Violation, Void for vagueness, Lack of notice: The SEC complaint violates the Constitution because the federal securities laws are not clear, do not give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, are vague, and are arbitrarily and discriminatorily enforced. 
  • Exempt Private Placement: Defendants’ private placement took place pursuant to Rule 506(c) of Regulation D.
  • Lack of Extraterritorial Authority: The SEC lacks extraterritorial authority over any of the transactions between Defendants and foreign purchasers.
  • Jurisdiction: Defendants are not subject to general or specific jurisdiction in United States District Court Southern District of New York.   

It will be interesting to see how this all unfolds because it will answer many questions that exist from both practitioners and issuers in this space. Please email me with questions or leave a comment below!


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