US Court Tells Telegram and SEC to Focus on 'Economic Realities' of Gram Token Sale

Published on by Coindesk | Published on

A U.S. federal judge says the SEC shouldn't get hung up on "Labels" in determining whether messaging platform Telegram conducted an illegal securities offering.

Castel also asked about Telegram's economic justification for locking up the first round of purchase agreements, whether the gram tokens sold in the first round had utility, if the TON blockchain would be able to operate at launch and what would happen if Telegram's executives disappeared to the British Virgin Islands - where Telegram is currently domiciled - at launch.

Telegram's attorney assured the judge the 36 validators on Telegram's testnet blockchain showed there was sufficient interest in the blockchain from the "Decentralized community." The Securities and Exchange Commission, by contrast, focused on Telegram's alleged legal violations, pointing to how the company's sales to accredited investors were not done according to Reg D standards.

The SEC is alleging Telegram violated federal securities laws with its token sale.

At the beginning of the status conference hearing, Telegram submitted additional documents from the deposition of former Telegram chief investment advisor John Hyman and materials from foreign countries, and Judge Castel closed the evidentiary record.

Judge Castel likened Telegram's gram sale to gold, saying a seller would not ask individuals if they were interested in gold before selling the precious metal, on which investors often speculate.

Telegram had not provided a reasonable justification for the lockup, creating the conditions for initial purchasers to resell their presale tokens and create a secondary market, Tenreiro further alleged.

Telegram lawyer Alexander Drylewski argued that the SEC's Howey Test does not apply to digital assets unless those assets are offered with a promise of managerial oversight that will increase their value over time.

Castel reserved judgment on the preliminary injunction and assured Telegram's lawyer Drylewski there would be a judgment in the case before April 30, when gram investors expect to see the TON blockchain launched.

Telegram consented to prolonging the preliminary injunction after Castel explained that not consenting would mean the court would make a decision immediately.

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