Pavel Durov, the Russian inventor of the encrypted communication app Telegram, and the Russian social media site VK, looks to lose a legal case brought by the SEC against the launch of his cryptocurrency, Gram, initiated within the Telegram ecosystem, TON.
The Russian news outlet The Bell put it this way...
Durov on verge of U.S. legal defeat. A New York court ruling issued Wednesday means the Securities and Exchange Commission (SEC) will almost certainly be successful in its legal bid to block the launch of Russian billionaire Pavel Durov’s new cryptocurrency, Gram. The conflict between the founder of messaging app Telegram and the U.S regulator is over the classification of Gram tokens, which Telegram sold to investors for $1.7 billion to raise funds to develop its TON blockchain platform. This week’s ruling stated 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.” If the court does finally come down on the side of the SEC, finding that Gram is a form of security, it would not only jeopardize the project’s future, but mean Telegram had already broken the law by not obtaining advance approval for Gram.
The SEC launched the action against Telegram in 2019. Here is the complaint from its website.
According to the SEC’s complaint, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger. Defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets. The complaint alleges that defendants failed to register their offers and sales of Grams, which are securities, in violation of the registration provisions of the Securities Act of 1933.
“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token,” Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Early Bitcoin investor and monetary theorist Jeffrey Wernick declared, "I predicted a long time ago it would not.
"From the very beginning I have been warning everyone these are securities. They were issued and sold based upon the expectation of being bought and sold at huge profits. That is why so many investors wanted those that could get listing on exchanges and paying big fees to do so. They knew investors were enticed not at the opportunity of spending the tokens inside the network but speculating on their value outside the network.
"Everyone was bragging about their big returns trading the tokens for speculative gain. Not bragging about how much they wanted to hold the tokens and spend within the network. There has been lots and lots of speculation outside the network. Almost no spending inside. I think if everyone was more honest they would admit they were buying tokens to bet on their future value. Not to have for future use. I wish the SEC did not exist. I do not support regulation. The rules and regulations hamper innovation. And protect, not investors, but Wall Street. But stupidity or wishful thinking is not the answer."
The case now goes to the Second Circuit Court of Appeals for further ruling.
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