The ruling came into force on 24 March 2020, following a request put forward by the Securities and Exchange Commission. The Commission alleged that Telegram sold unregistered securities. Telegram was initially subpoenaed back in October 2019 after serious allegations that the company violated federal law. It claimed that the allegedly unlawful token sale generated $2 billion. On Tuesday, the Court was of the opinion that the Securities and Exchange Commission is more likely to prove victorious in the outstanding court battle.

In his statement, Judge Catel stated that "The Court finds that the Securities and Exchange Commission has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram's ongoing efforts". The Court has since stated that it believes that Telegram initiated the project to maximise the amount initial purchasers would be willing to pay. 

In its opinion, the Court adopted the Howey Test, a test created by the Supreme Court. This test was formulated with the idea of being able to better determine whether a transaction qualifies as an investment contract or security. Under the Securities Act of 1933 and the Securities Exchange Act of 1934 transactions which qualify as investment contracts or securities are subject to further specific requirements about disclosure and registration. The Judge further noted that when considering the economic realities under the Howey test, the resale of Grams placed into the secondary public market would have been a fundamental part when issuing the sale of securities without a required registration statement.

Through this opinion, the Judge further noted that purchasers would be expecting a profit, this besides the fact that Telegram had brought forward the notion that such purchases would not determine the development of the Telegram Open Network blockchain. In his opinion, Judge P. Kevin Catel stated that "as a matter of fact", it would be.

Although the Judge had previously expressed that both parties should refrain from getting caught up in labels during a February hearing, he did conjure a distinction between the Gram tokens and the securities Telegram's customers allegedly bought during the initial coin offering in his ruling. 

The opinion stated that "The Court rejects Telegram's characterisation of the purported security in this case, while helpful as a shorthand reference, the security, in this case, is not simply the Gram, which is little more than [an] alphanumeric cryptographic sequence."

In the meantime, Telegram has sought to appeal the Court's recent ruling in favour of stalling the distribution of Gram tokens brought forward by the Securities and Exchange Commission.

For access to Judge P. Kevin Catel's full opinion kindly click here.

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