Telegram Group: SEC halted a $1.7 billion unregistered digital token offering

Brief Summary: Telegram Group Inc. Securities Case

Issue: Whether Telegram Group Inc.’s offering of digital tokens was in violation of the U.S. securities laws by failing to register the offering.

Rule: The U.S. securities laws, specifically the Securities Act of 1933, require that any offer or sale of securities be registered with the Securities and Exchange Commission (SEC) unless an exemption applies.

Application: The SEC argued that the digital tokens offered by Telegram (referred to as “Grams”) were securities because they were investment contracts under the Howey Test, which defines an investment contract as any transaction in which a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.

Conclusion: The court concluded that the offering of Grams was indeed subject to the securities laws and that Telegram had failed to properly register the offering, resulting in a preliminary injunction prohibiting the delivery of the Grams to purchasers.

Detailed IRAC Outline of Relevant Facts and Discussion

The specific legal issue is whether Telegram Group Inc.’s sale of $1.7 billion worth of digital tokens, Grams, was in violation of federal securities laws due to non-registration.

Relevant laws and regulations include:

  1. Securities Act of 1933, Section 5: Requires registration of securities with the SEC.
  2. Howey Test: A Supreme Court ruling setting forth a test for determining what constitutes an investment contract (security).


Factual Background:
– In 2018, Telegram Group Inc. raised $1.7 billion through two rounds of funding by selling purchase agreements for Grams to accredited investors.
– The funding was aimed at developing the Telegram Open Network (TON), a blockchain-based platform.
– Telegram promised to deliver Grams to the initial purchasers following the launch of TON.
– The SEC intervened and argued that the Grams were securities because their value was expected to increase based on Telegram’s efforts to develop the TON platform, fulfilling the Howey Test.

Legal Analysis:
– The court analyzed the nature of the agreements and the expectation of the investors.
– The Grams purchase agreements included a clause that restricted the resale of Grams unless they were registered with the SEC or qualified for an exemption.
– The investors were likely expecting profits from their investment based on Telegram’s promotional efforts and the anticipated success of the TON platform, characterizing the transaction as an investment contract.

SEC’s Arguments:
– The SEC’s primary argument was that Telegram had engaged in a scheme to distribute the Grams into a secondary public market, which would constitute a sale of securities.
– The regulatory body claimed that since Telegram did not provide information typically found in a registration statement, investors lacked information necessary to make informed investment decisions.

Telegram’s Defense:
– Telegram contended that the purchase agreements were private transactions that did not need to be registered.
– They also argued that the actual Grams were not securities, and that the SEC was conflating the purchase agreements with the Gram tokens themselves.

– The court concluded that, based on the economic realities under the Howey Test, the Grams were securities.
– It found that Telegram had not registered the offering nor had it satisfied any exemption from registration.
– As a result, the court granted the SEC’s request for a preliminary injunction, preventing Telegram from delivering the Grams to investors.
– Telegram was required to return funds to investors and pay a civil penalty.

Post-Case Developments:
– Following the court’s decision, Telegram ultimately decided to cancel the launch of TON and settle with the SEC.
– The settlement included an $18.5 million civil penalty and the requirement to return $1.2 billion to investors.

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