According to a preliminary ruling, the Southern District of New York court agreed with the SEC’s argument that Telegram sold unregistered securities and ordered the company to refrain from the planned distribution of Gram tokens.

Judge Castel concluded that the regulator was convincing in upholding the position that the placement of the Gram meets the signs of an offer of securities according to the Howey Test. The latter was developed by the Supreme Court to determine the conformity of certain transactions to investment contracts.

In 2018, Telegram raised $ 1.7 billion through an ICO in exchange for the future delivery of 2.9 billion Gram tokens to 175 investors, who later, as expected, could sell them with a premium on the secondary market. Telegram argued that the agreement was in line with the definition of a private placement of securities that is subject to an exception to provision D 506 (c).

The company sold Gram as part of a so-called simple agreement on future tokens, or SAFT, which is an investment contract designed to provide relevant laws with alternatives to ICOs.

On October 11, the SEC through a federal court secured a temporary ban on the distribution of Gram among investors. The agency considered that the asset is a security, and Telegram violated US law during the ICO.

Telegram challenged this claim but agreed to postpone the launch of the network until the case is settled with the SEC.

The lawyers of the company insisted that the initial agreements with the buyers did correspond to the definition of investment contracts, however, the secondary sale of tokens did not meet it, and these processes are not interconnected.

Under pressure from SEC, Telegram agreed to postpone the launch from the end of October to April 30, 2020, and offered dissenting investors to return 77% of the invested funds. The current court decision may actually make the temporary ban on the distribution of Gram tokens permanent.

“Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement,” said Castel.

The court concluded that Telegram realized that primary buyers are not ready to pay $ 1.7 billion for the purchase of Gram, if they are considered solely as a means of storage and transfer of value.

Instead, according to the court, Telegram created a scheme that allowed to maximize both the number of funds raised from primary investors and the number of funds that they could receive when reselling tokens.

Despite quarantine, the court issued a verdict earlier than expected, until the end of April. According to the contract of sale of Gram tokens, primary investors will have the right to receive their money back if the TON network is not launched before April 30.

Telegram retains the right to appeal the injunction.