Telegram’s Bold Response to the SEC: You do not know what a Security is

On October 16, 2019. Telegram’s counsel, Skadden, Arps, Slate, Meagher & Flom LLP filed its response to the SEC’s emergency application for preliminary injunction. 

Telegram claims that the SEC unreasonably refused to enter into a stipulation and documents requested by the SEC implicate serious data privacy issues

The Response states that Telegram has agreed to stipulate that it will not make any offers, sales or deliveries of its expected cryptocurrency, called “Grams,” so that the Court can resolve the legal issues at the heart of the matter.  Telegram believes that the SEC is trying to steamroll it into consenting to a preliminary injunction where there is no need. Telegram believes this is so that the SEC can gain a strategic litigation advantage and engage in broad and burdensome “emergency discovery” despite the absence of any emergency.

Telegram claims it has been communicating with the SEC for the past 18 months

The Response states that Telegram has voluntarily engaged with, and solicited feedback from, the SEC regarding the development and planned launch of its decentralized blockchain platform (the “TON Blockchain”) and Grams, consistent with the SEC’s publicly stated desire to engage with developers of digital asset technologies.  Telegram has stated that it has engaged with the SEC in the following ways:

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

Telegram claims that the SEC created the emergency situation

Telegram claims that during the 18 months during which the SEC and Telegram were communicating, 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 eleventh hour to file an ex parte application to enjoin Telegram’s launch. 

Grams are not securities based on precedent, the SEC’s own views and common sense

Telegram claims this was not an offer to the general public via an Initial Coin Offering (ICO).  Instead, Telegram entered into private purchase agreements with a limited number of highly sophisticated purchasers that provided for the future payment of Grams but only following the completion and launch of the TON Blockchain.  The Grams, unlike purchase contracts, will be merely a currency or commodity (like gold, silver or sugar) – not a “security”- once the TON Blockchain launches. Telegram cites SEC Director William Hinman’s speech Digital Asset Transaction: When Howey Met Gary.

Where do the SEC and Telegram go from here?

A Court hearing is scheduled in the Southern District of New York on October 24, 2019.  Telegram is seeking an order that:

• Temporarily halts the launch of the TON Blockchain;
• Relieves Telegram of any obligation to produce documents or witnesses in response to the SEC’s emergency requests prior to October 24; and
• Directs the parties to submit an expedited case schedule to resolve the legal issues.

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.  If you have any questions, please email me or leave a comment below!