Reed Smith Client Alerts

On March 24, 2020, the United States District Court of the Southern District of New York granted the Securities and Exchange Commission (SEC) preliminary injunctive relief against Telegram Group Inc. and TON Issuer Inc. (the Defendants).1 In early 2018, pursuant to an exemption for private placements, the Defendants raised almost $1.7 billion from both U.S. and foreign sophisticated investors through purchase agreements in order to build the TON blockchain network and its native cryptocurrency (Grams).2 In exchange, these investors would receive $2.9 billion worth of Grams upon launch of the TON blockchain. In October 2019, the SEC filed an emergency action and obtained a temporary restraining order against the Defendants, alleging that the Defendants’ plan to distribute Grams to the investors constituted an illegal securities offering. On February 19, the SEC and the Defendants appeared before Judge Castel in the Southern District of New York at a hearing on the Court’s order to show cause.

The Court determined that the SEC had shown a substantial likelihood of success in proving that the Defendants’ 2018 offering was "part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram's ongoing efforts."3 According to the Court, such an offering would constitute the offering of securities under the Howey test. The Howey test provides the framework for determining whether an instrument is an "investment contract," which may need to be registered as a securities offering unless an exemption applies. It consists of the following four prongs: (i) investment of money, (ii) common enterprise, (iii) expectation of profit, and (iv) efforts of another.4

The Defendants argued that their offering consisted of two distinct sets of transactions: the 2018 purchase agreements with sophisticated investors, and the delivery of the Grams when the TON blockchain launches.5 While the Defendants conceded that the purchase agreements are securities, the Defendants claimed that the Grams would be commodities upon issuance. According to the Defendants, these two sets of transactions must be reviewed separately from a securities law perspective. The analysis of whether or not the issuance of Grams constitutes a securities offering must be made at the launch of the TON blockchain.