In Brief

  • Federal district court judge issues temporary injunction against Telegram,
  • Judge said it's likely that Telegram's native crypto, Grams, was illegally being offered as a security.

A federal court judge today sided with the US Securities and Exchange Commission against Telegram and granted a preliminary injunction in the social network's $1.7 billion initial coin offering. 

In a opinion and order filed on Tuesday with the New York Southern District Court, Judge P. Kevin Castel found "that the SEC has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities under the Howey test."

The Howey test is a defacto test created by the Supreme Court for determining whether certain transactions qualify as investment contracts.

In 2018, Telegram raised $1.7 billion in an ICO in exchange for a promise to deliver 2.9 billion gram tokens to 175 wealthy investors, who later would resell those tokens to the public for a handsome profit. Telegram argued that agreement was lawful under a private placement of securities covered by a Regulation D 506(c) exemption.


It sold grams under a so-called simple agreement for future tokens, or SAFT, which is an investment contract designed to provide a compliant alternative to an ICO.

The argument

The SEC argued in October that the token sale for the Telegram Open Network, or TON blockchain, was illegal, because grams constituted securities under US law, and sales of securities have to be registered with the agency. Telegram has disputed that claim but agreed to hold off launching the network until the case is resolved with the SEC.

Telegram had argued that the original agreements with the purchasers were indeed securities. But it said that a secondary sale of grams to the public, which would happen after it launched TON, would be unrelated and not securities. 


The SEC saw things differently and has been fighting to stop the issuance grams. On Oct. 11, the SEC secured a temporary injunction to halt the launch of TON, which was originally slated for the end of that month. (Grams could not actually exist until the blockchain launched.) And since then, the agency has been pushing for a permanent injunction. 

Moving closer to a permanent injunction

Today, the SEC moved one step closer to securing that permanent injunction.

“Considering the economic realities under the Howey test, the Court finds that in the context of the scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a registration statement,” Castel said. 

He went on to write that “Telegram knew and understood that reasonable purchasers would not be willing to pay $1.7 billion to acquire Grams merely as a means of storing and transferring value. Instead, Telegram developed a scheme to maximize the amount initial purchasers would be willing to pay by creating a structure to allow these purchasers to maximize the value they receive upon resale to the market.”

… An injunction, prohibiting the delivery of Grams to the Initial Purchasers and thereby preventing the culmination of this ongoing violation, is appropriate and will be granted."

Though Castel’s courtroom is closed due to the general quarantine, his ruling had been expected before the end of next month. Due to a clause in the purchase agreements Telegram issued for grams, if the TON network hadn't launched by April 30—which was the new date the social network had set for the launch of its blockchain—investors could be entitled to get their money back.

If it wants, Telegram can appeal the injunction and take this to trial. It certainly has the funds to do so. But nocoiner David Gerard doesn’t think that will happen. As he wrote in his blog, “They could give up and give all the money back to the investors, as the SEC wants—though they’ve already spent quite a bit of it. But I strongly suspect that about wraps it up for the Telegram ICO."

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