SEC to Telegram: Too little, too late

The U.S. Securities and Exchange Commission told a federal judge on March 30 that messaging app firm Telegram should not be allowed to sell its TON blockchain’s gram tokens even to non-U.S. buyers. 

Telegram had planned to launch the Telegram Open Network, or TON, blockchain on Oct. 31, 2019. At that time, it intended to create 2.9 billion gram tokens, which it had pre-sold to 175 buyers for $1.7 billion. Those pre-buyers would then be allowed to sell their grams to the general public. The SEC said that public sale would be an unregistered and illegal securities offering, and sued to block it, winning an emergency injunction on Oct. 11 and a temporary injunction on March 24.  

As the temporary injunction is good until the case is resolved, Telegram asked the court if it could sell grams to verified non-U.S. buyers. The already pushed-back launch date is April 30. If that doesn’t happen, the 175 pre-buyers can ask for their money back, potentially killing the project.

With more than 70% of the gram tokens allocated to non-U.S. buyers, Telegram on March 27 asked an already skeptical Judge P. Kevin Castel of the federal District Court for the Southern District of New York to “clarify” if his order applied to foreign buyers or only to U.S. citizens.

Too little, too late

In a March 30 response, the SEC argued the sale should not go forward, even to buyers who have supplied “know your customer” data to prove they are not American. 

Collecting “know your customer” data to exclude Americans from its 175 pre-buyers is something it should have done at the time, the SEC told Judge P. Kevin Castel of the federal District Court for the Southern District of New York. 

“Its offer to take now some of the steps it should have taken before to prevent flow back into the United States is too little, too late,” SEC attorney Jorge G. Tenreiro wrote. 

Too little, he argued, because Telegram cannot prevent the 175 pre-buyers from reselling their grams to U.S. buyers through a variety of channels, notably cryptocurrency exchanges. 

“Too late,” Tenreiro added, “because Telegram has sold unrestricted Grams to conduits all over the world, some of whom have already resold their interests—consistent with Telegram’s plan to ensure the widest distribution of Grams—including to United States investors.” 

Besides, “the temporary injunction’s language is clear,” Tenreiro said. “[F]rom the outset of this lawsuit Telegram understood, or should have understood, that the scope of the Application reached ‘any person or entity.’” 

Therefore, he added, Telegram’s request that the court “clarify” this question “is really a motion for reconsideration in disguise.”

No idea

Implicit in Telegram’s argument is that it can successfully use KYC data to exclude Americans. Only $424.4 million of the $1.7 billion raised came from U.S. investors, Telegram attorney Alexander Drylewski told Judge Castel in the March 24 filing.

The SEC doesn’t buy it. 

“The SEC has shown substantial evidence that, from the outset, Telegram’s contractual prohibition on resales was honored more in the breach than the observance,” Tenreiro replied. “Telegram knew that despite its sotto voce admonitions there was an active grey market for Grams as early as February 2018 … and continuing through at least July 2019.” 

Nor is there any record of Telegram conducting any KYC due diligence on its 175 initial gram buyers, he said.

“Telegram paid commissions to foreign brokers to find new investors, those brokers solicited investors in the United States,” said Tenreiro. “Telegram has no idea who those brokers solicited, let alone sold to.”