The District Court for the Southern District of New York ruled in favor of the SEC and denied Telegram’s request to allow it to distribute GRAM tokens to non US investors.
After many days of back-and-forth, during which the crypto community speculated about the outcome of the conflict’s potential outcome, the court order is in line with the SEC’s main arguments. The same claims that were behind the preliminary injunction were rejected. These included whether Telegram could flood the United States with billions of Grams, and if the token is a security. If so, would the distribution violate federal securities laws.
The judge stressed that Telegram’s actions and the purchase agreements were the main points of the court’s opinion and order. This is not just Gram distribution or the initial buyers. Also, the court finds that Grams would be resold into the secondary market if the scheme involves US buyers. This is likely to satisfy Morrison’s transactional test.
According to the SEC, Telegram is accused of taking steps to distribute Grams to the public. The initial investors were merely intermediaries or distributors of Grams to general public.
It is too late to challenge the court
According to the court filing, Telegram suggested for the first time that safeguards be applied to avoid any involvement of US retail investors if early token holders decide to resell their Grams in future. To prevent US-based addresses, the issuer suggested that current purchasers be subject to contractual prohibitions.
The court found several issues with the proposal. Telegram did not examine the legality its restrictions, as the purchase agreements were signed two years ago. These restrictions are against TON Blockchain’s grant of anonymity to Grams sellers and buyers.
“Therefore any restriction on who a foreign Initial Buyer could resell Grams is doubtful in real-world enforceability. Telegram concludes with the statement that the TON Wallet was not part of the TON Blockchain. It is a useful, but non-essential feature.
Telegram’s request to clarify was denied by the court. The court stated that Telegram had been aware of the SEC’s ban scope and overarching arguments since October 11, 2019, and denied Telegram’s request. Telegram did not oppose the injunction form and has never cited Morrison.
It further explained that the language includes a prohibition on “delivering Grams any person or entity or taking any other actions to effect any unregistered sale or offer of Grams,” and has been part of the SEC’s motion from its inception.
Telegram cited the Supreme Court’s decision regarding the extraterritorial application US federal securities law and stated that over 70% of its ICO funds were raised through Purchase Agreements. This reasoning is why Gram issuer once again questions the SEC’s oversight authority, since it entered into agreements with non-US entities outside the United States via contracts that contain foreign choice-of law provisions.
