Following an emergency action and injunction, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. (the "Defendants") agreed to settle SEC charges for unregistered offerings of digital tokens.
The Defendants were: (i) enjoined from further violating the registration provisions of SA Sections 5(a) and 5(c); (ii) ordered to disgorge $1,224,000,000, with credit for amounts returned to purchasers of the coins; (iii) ordered to pay a civil penalty of $18,500,000; and (iv) required to notify SEC staff before issuing any digital assets for the next three years.
On October 11, 2019, the SEC obtained a preliminary injunction order stopping the offering after the Defendants had already raised more than $1.7 million. According to the SEC, the tokens ("Grams") were securities requiring registration because the initial purchasers expected to profit from the Grams' eventual resale (as opposed to using them as currency). The SEC argued that, although the Grams were being sold to accredited investors in generally private transactions, the Defendants have not taken any steps to prevent further redistribution in the United States. As a result, the SEC stated, Grams would not benefit from the private placement exemption from Securities Act registration, assuming that the Grams are, in fact, "securities."
On March 24, 2020, the U.S. District Court for the Southern District of New York ("SDNY") issued an injunction against the Defendants, stating that:
"[The SEC] has shown a substantial likelihood of success in proving that the 2018 Sales were part of a larger scheme, manifested by Telegram's actions, conduct, statements, and understandings, to offer Grams to the Initial Purchasers with the intent and purpose that these Grams be distributed in a secondary public market, which is the offering of securities under SEC v. W.J. Howey Co."
The Court approved the settlement on June 26, 2020.
Commentary
The size of the settlement is certainly headline-worthy, but it was only a matter of time before Telegram settled after the Court granted the SEC's request for an injunction in March. The injunction Order, which is one of the most significant decisions to date addressing whether a digital coin is a security under the Howey test, made it clear that Telegram was not going to prevail in the litigation, and would likely settle the case. Since the injunction, the SEC has, and will likely continue to, aggressively investigate and initiate enforcement actions against digital coin distributors for unregistered offerings.
Primary Sources
Following an emergency action and injunction, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. (the "Defendants") agreed to settle SEC charges for unregistered offerings of digital tokens.
The Defendants were: (i) enjoined from further violating the registration provisions of SA Sections 5(a) and 5(c); (ii) ordered to disgorge $1,224,000,000, with credit for amounts returned to purchasers of the coins; (iii) ordered to pay a civil penalty of $18,500,000; and (iv) required to notify SEC staff before issuing any digital assets for the next three years.
On October 11, 2019, the SEC obtained a preliminary injunction order stopping the offering after the Defendants had already raised more than $1.7 million. According to the SEC, the tokens ("Grams") were securities requiring registration because the initial purchasers expected to profit from the Grams' eventual resale (as opposed to using them as currency). The SEC argued that, although the Grams were being sold to accredited investors in generally private transactions, the Defendants have not taken any steps to prevent further redistribution in the United States. As a result, the SEC stated, Grams would not benefit from the private placement exemption from Securities Act registration, assuming that the Grams are, in fact, "securities."
On March 24, 2020, the U.S. District Court for the Southern District of New York ("SDNY") issued an injunction against the Defendants, stating that:
"[The SEC] has shown a substantial likelihood of success in proving that the 2018 Sales were part of a larger scheme, manifested by Telegram's actions, conduct, statements, and understandings, to offer Grams to the Initial Purchasers with the intent and purpose that these Grams be distributed in a secondary public market, which is the offering of securities under SEC v. W.J. Howey Co."
The Court approved the settlement on June 26, 2020.
Commentary
The size of the settlement is certainly headline-worthy, but it was only a matter of time before Telegram settled after the Court granted the SEC's request for an injunction in March. The injunction Order, which is one of the most significant decisions to date addressing whether a digital coin is a security under the Howey test, made it clear that Telegram was not going to prevail in the litigation, and would likely settle the case. Since the injunction, the SEC has, and will likely continue to, aggressively investigate and initiate enforcement actions against digital coin distributors for unregistered offerings.
Primary Sources
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