SDNY COURTHOUSE, March 23 -- On February 19 lawyers for Telegram and the U.S. Securities and Exchange Commission argued for more than two hours about the SEC's request for a preliminary injunction against Telegram's proposed crypto currency, the Gram.
Now on March 24, in a world made different by the Coronavirus crisis, SDNY Judge P. Kevin Castel has granted the SEC's request for a preliminary injunction, writing that "the Court finds 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 to which no exemption applies. The motion for a preliminary injunction will be granted." Full decision for download below.
By the end, their agreement that Telegram will hold off was extended, but only under U.S. District Court for the Southern District of New York Judge P. Kevin Castel rules on the SEC's request. Judge Castel said he is mindful of an April 30 deadline by which Telegram would have to return investors' unspent money.
In essence the SEC argues that Telegram's raising of $1.7 billion to lead to the Gram crypto currency was an offer of securities which should have been registered with the SEC in the 1946 test set out by the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293.
That case involved oranges, and that fruit as well as gold and even Mets season tickets were used as examples by the two sides, vying for Judge Castel's ruling. (The Mets tickets analogy used by Telegram's Skadden Arps attorney Alexander C Drylewski caught Judge Castel's attention: he said the Mets improving the roster sounded like "a fantasy," drawing laughter in the packed courtroom).
More seriously, Drylewski emphasized that Telegram would not be a validator of the TON blockchain, and therefore investors were not banking on Telegram's continuing involvement in management.
SEC lawyer Jorge Gerardo Tenreiro countered that Telegram founder Pavel Durov had admitted, in a deposition the SEC conducted, that he cares deeply about the reputation of Telegram. On that basis, Judge Castel repeatedly asked Drylewski to admit that Telegram would get involved in a sufficient community of validators did not immediately emerged. Drylewski answered that Telegram could not do that, then said that Telegram had represented that it would not. Judge Castel asked, "Which is it?"
Drylewski countered that since the validators would have to agree by a two-thirds margin, no one actor would control things. This, he said with some effect, was the benefit of blockchain and this crypto currency in particular. He compared Grams favorably to both Bitcoin and Ethereum, while saying that Telegram got its idea of a TON Foundation, not yet in existence, from the foundations of Bitcoin and Ethereum. The upshot is that Judge Castel will grant or not grant the SEC requested preliminary injunction before April 30.
Drylewski offered that Telegram could live with injunctions against particular parts of its plan as long as the overall plan can go forward. He painted a picture of developers adding apps and smart contracts to the TON blockchain and Grams becoming a "new mass-market crypto currency" unlike Ethereum or Bitcoin. That remains to be seen.