A U.S. court has ruled that three Telegram employees - including CEO Pavel Durov - should testify in the case filed against the company by the Securities Exchange Commission.
The SEC filed an emergency restraining order against Telegram in mid-October, informed by its view that GRAM tokens are securities, a claim the company denies.
GRAM case gets weighs heavily with SEC
Telegram was preparing to distribute its GRAM tokens at the end of October per its investor agreement. While there were widespread worries over whether the communication giant would be able to meet its commitment to investors by the end of October, the token’s distribution was ultimately thwarted by a stop order filed by the SEC on October 11.
Speaking at the time on the motivations of filing the emergency order, Stephanie Avakian, a co-director at the SEC’s Division of Enforcement, reiterated the SEC’s view that GRAMs are indeed securities. Avakian stated, “Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold. We allege that the defendants have failed to provide investors with the information regarding Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”
The designation of GRAM tokens is the root of the argument between Telegram and the SEC. Following the emergency order, Telegram filed a response to the allegations that the GRAM token sale was held unlawfully. In its November 12 response, the communications giant reiterated its position that the GRAM tokens it had sold through its $1.7 billion ICO in 2018 were not securities.
However, Telegram acquiesced that the purchase agreements which its investors had signed to were indeed securities. Interestingly, the company said that it was complying with existing securities law with regards to the purchase agreement.
Telegram’s response explained, “Significantly, Telegram has already treated the Private Placement as a securities offering pursuant to valid exemptions to registration under the Securities Act of 1933. The Grams themselves, as distinct from the purchase contracts, will merely be a currency or commodity (like gold, silver or sugar) — not a “security” — once the TON Blockchain launches.”
However, the SEC says that despite Telegram’s stance, its ICO was held in contravention of the law.
Steven Peikin, another Co-Director of the SEC’s Division of Enforcement, reiterated this position while accusing Telegram of attempting to circumvent structures put in place for the public good. Peikin said, “We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token. Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Investors are standing strong
Due to the emergency order, Telegram was unable to meet its contractual requirements with its investors, risking significant financial losses. The contracts between the investors and TON, the issuer of GRAM tokens, stipulated that if the tokens were not distributed by October 31, Telegram would have to refund all the money it collected during the token sale.
However, in what is seen as a resounding vote of confidence in the Telegram Open Network (TON), investors voted to reject any reimbursements despite the issuer’s legal woes. The investors decided to wait until April 2020 to officially launch the TON blockchain and receive their GRAM tokens. Additionally, the investors authorized the use of a further $80 million to go towards organizational costs until the launch date.
Despite the legal woes it is facing, the TON project has been slowly hitting milestones in its roadmap. The code for the TON blockchain was made available to the public at the beginning of September. The issuer also asked investors to begin the process, which would lead to them finally receiving their GRAM tokens by generating their public keys. Lastly, Telegram published a desktop wallet compatible with GRAMs that is currently successfully running on its test network.
Telegram to testify
Despite Telegram’s filing to dismiss the charges levied against it with regard to violating the registration provisions of the Securities Act, the court sees fit to continue with the case. A US federal judge signed a document dated November 25, 2019, authorizing the deposition of three individuals who are believed to be connected to the Telegram ICO.
District Judge P. Kevin Castel of the New York Southern District Court ordered that Telegram founder and CEO Pavel Durov should give legally binding testimony with regard to his role in the matter in January 2020. The court provided for two dates depending on the availability of both parties, that is, Durov and the SEC.
The court also ordered that Ilia Perekopsky, Telegram’s vice president, should be deposed in London on December 16. Lastly, Shyam Parekh, a Telegram employee whose name is on some of the letters sent to TON investors will also be required to give his testimony in London on December 10.
It is important to note that Telegram has ceased activity connected to the issuance of GRAM tokens as was revealed in court documents. Telegram stated that it would not make any offers, sales, or deliveries of its digital asset to maintain the status quo until the courts are able to resolve the legal issues present in the whole debacle. However, Telegram continues to assert its innocence while also claiming that the SEC is not acting in good faith as they have been cooperating with the regulator.
The Telegram case is reminiscent of the legal issues faced by Facebook’s Libra, which has also been forced to halt proceedings until regulators are satisfied that it does not pose a threat to the US dollar. The New York court will hear the TON and Telegram case between February 18 and 19, 2020.