Telegram is being sued by the SEC over allegations that the $1.7 billion it raised in an ICO for its upcoming blockchain network, the Telegram Open Network, constituted an unregistered securities offering.
That’s made other blockchain companies anxious, and some of the biggest in the industry are now coming out to voice their concerns over the precedent that could be set in Telegram’s case.
Earlier this week, two industry organizations, The Chamber of Digital Commerce and the Blockchain Association, filed amicus briefs with a US federal court in the Southern District of New York in an attempt to have their say. Major players in crypto are represented across the two organizations, such as Coinbase, Kraken, and Binance.US.
Telegram’s case rests on the application of the “Howey Test,” a 74-year-old test that determines an asset to be a security if it is an “investment of money in a common enterprise,” and “comes with an expectation of profit derived solely from the efforts of others.”
The Chamber of Digital Commerce, however, wants the court to take a clear position on distinguishing the sale of the assets (i.e. the ICO) from the actual blockchain-based assets that were being sold (i.e. the tokens).
"Without a clear legal distinction between a transaction determined to be an investment contract and the digital asset that is the subject of the investment contract, these software developers, retailers, healthcare providers, advertising companies, and others may not be able to develop or use blockchain technology without unintentionally triggering the U.S. federal securities laws every time a digital asset is used as part of their network," wrote a lawyer from the Chamber of Digital Commerce in the brief.
“By underscoring the correct analytical framework, this court has an opportunity to identify the 'discernable parameters' of the law and provide a predictable legal environment for the use of blockchain technology to develop across industries, and enable the United States to foster innovation,” the brief added.
Resolving the issue correctly could resolve "uncertainty as to how federal securities laws apply to digital assets,” wrote the Chamber of Digital Commerce’s lawyer, which “is stifling economic development in the United States."
While the Chamber of Digital Commerce takes no position on Telegram's ICO per se, the Blockchain Association, on the other hand, comes out in full support of Telegram.
“The Court should not block a long-planned, highly anticipated product launch by interfering with a contract between sophisticated private parties. Doing so would needlessly harm the investors that securities laws were designed to protect, its lawyers wrote in a brief filed to the court.
They make the argument in their brief that Telegram's ICO didn't break any laws and that the court should rule against the SEC. “The SEC has bizarrely chosen to attack the decision by Telegram to use an investment contract model that was designed expressly to comply with the SEC’s own regulations,” its lawyers wrote.
They continued, “Nothing in the securities laws or precedent—which are specific about resale restrictions—suggest that an issuer cannot enter into an investment contract with accredited investors...and deliver the resulting product to those accredited investors in satisfaction of those contracts, merely based on theoretical resale concerns.”
The Blockchain Association also slammed the SEC for its “failure to provide clear guidance about the application of the securities laws in this space.”
Its lawyers wrote, “Telegram discussed its plans with SEC staff for a year and a half, provided copious information, and responded to limited feedback by adjusting the design of its transaction. Yet at the end, the SEC has sued, and the SEC’s briefs thus far say nothing about the substance of those discussions.”