Telegram is Mired in litigation. Is the extra six months enough?

Author: LornaQ
Source: caijing online chain caijing

Original title: Telegram defense rejected, is the extra 6 months enough?

Judge p. Kevin Castel of the U.S. district court for the southern district of New York, who heard the SEC's case against Telegram for issuing illegal securities, decided to retain the SEC's motion to deny Telegram's defense that the SEC's complaint violated the ambiguity and invalidity principle.

Justification for the Telegram: "what the SEC did not act constitutes a violation of federal securities laws provide clear guidance, the SEC pursuant to the terms and conditions of due process, to provide reasonable notice of legal obligations to Telegram, this notice is advantageous to the Telegram in reasonable dominate their behavior. Before you are accused the SEC take the legal action of temporary and casual." At the same time, the definition of an "investment contract" under federal securities law is unclear, giving the company grounds for immunity. The SEC found Telegram's defense inadequate, noting that the "Investment partnership" was clearly defined in the regulatory Framework for "Investment Contract" Analysis of Digital Assets

Earlier, Telegram claimed it had "not issued any securities to the public through ICO". The $1.7 billion it raised was through the simple future token protocol (SAFT) framework. Telegram has signed private purchase agreements with some private investors, which stipulate that Gram can only be subscribed for after TON has started.

"Telegram has treated private placement as an offering of securities under the effective registration exemption under the securities act of 1933," Telegram said. "after the launch of TON, Gram, under the SAFT framework, will be transformed into a pass-through or commodity (such as gold, silver or sugar) rather than a 'security'."

SAFT is an "investment contract" offered by cryptocurrency publishers to licensed investors, promising to provide a certain number of licenses when the network operates. SAFT is considered an issue of securities and is therefore subject to the securities act. Under this framework, SAFT is treated as an issue of securities to investors during the fundraising period, assuring them that the certificate will be delivered after a specified time. After the issuance of the pass-through, the pass-through may be considered as a non-securitized utility Token operating outside the existing securities laws, but does not represent SEC endorsement.

In SEC v. W.J. HoweyCo., 328 U.S. 293 (1946) (Howey), the SEC explicitly states that the "Howey Test" applies to any contract, scheme, or transaction, whether or not it has the characteristics of a typical security. Howey's case focuses not only on the form of issuance of the digital asset itself, but also on the environment surrounding the digital asset and the manner in which it is sold or resold (including secondary market sales). Therefore, issuers and other individuals and entities engaged in the marketing, offer, sale, resale or distribution of digital assets need to analyze the transactions to determine whether the securities law applies.

The HoweyTest, which determines whether a financial instrument is an "investment contract" and thus constitutes a "security", contains four elements :(1) capital input; (2) invest in a common cause; (3) expect to make profits; (4) not directly involved in the operation, relying only on the efforts of the initiator or a third party.

The "investment contract" conforms to the four elements of the "Howey Test". The investor invests in a common enterprise and expects to make a profit from it. The investor is not directly involved in the operation, only relying on the efforts of the initiator or a third party.

Howey's case points out that the subscription or acquisition of a digital asset is usually purchased in physical (or legal) currency, exchanged for another digital asset, or otherwise, in accordance with the "capital input"; The SEC notes that when evaluating digital assets, it often finds a "common enterprise" behind them. When using the HoweyTest to analyze digital assets, the main question is whether the subscriber has a reasonable expectation of profit from the efforts of the originator or a third party. The purchaser may wish to obtain a return by participating in the distribution or by means of asset appreciation, such as selling on the secondary market for a profit. This element is satisfied when the sponsor, or other third parties (or affiliates of third parties) (i.e., "active participants" (AP)) provide the basic management efforts that affect the success of the business, and investors reasonably expect to profit from these efforts.

On Oct. 11, the SEC filed a temporary restraining order against Telegram, abruptly halting Telegram's plan to list Gram, its cryptocurrency, at the end of October.

On October 17, Telegram sent an email to investors postponing the start of the TON blockchain project, pushing the deadline from October 30, 2019 to April 30, 2020, and saying it would return 77% of its investment if most investors did not agree to the extension. A majority of investors voted against the refund, delaying the tentative launch date by six months.

On November 25, the court ordered Telegram founder Pavel Durov to testify in the Gram token sale on January 7 or 8, 2020. Telegram vice President Ilya Perekopsky and Gram employee Shyam Parekh will also testify on separate dates.

While Telegram has steaunted investors for the time being, buying an "extra" six months, there is still uncertainty about whether the extra time will be enough.

If the SEC's tug-of-war with Telegram goes beyond the deadline, the company risks losing its plan to issue COINS. Telegram's business has been burning cash, burning through $70 million in server fees, user verification and employee compensation in 2017 alone. According to the white paper, Telegram is expected to spend $620 million in four years from 2018. If Telegram has been unable to generate revenue and spending levels continue to rise, the company could eventually face bankruptcy or be forced to raise more capital on adverse terms.

The original link: http://onchain.caijing.com.cn/20191129/4630449.shtml

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