Telegram requested to distribute tokens for its upcoming blockchain network to non-US investors, who comprised the bulk of its $1.7 billion raise. Request denied.
A New York federal court today denied Telegram’s request to distribute tokens, raised in a $1.7 billion ICO for its upcoming blockchain network, to non-US purchasers. This effectively prevents Telegram from launching the Telegram Open Network until further notice.
Telegram had last week requested clarification from the New York Southern District Court about the terms of a preliminary injunction against the distribution of Grams that the court granted on March 24. The injunction request came from the US Securities and Exchange Commission (SEC), which since October 2019 has contended that the ICO for TON constituted an unregistered security sale, and was thus illegal.
Telegram had claimed that the SEC had no right to prevent it from distributing tokens to non-US purchasers since only $424.5 million of its $1.7 billion raise—less than 30%—came from US buyers. Telegram also promised to block US addresses from using the TON wallet.
But Judge P. Kevin Castel rejected these arguments because Telegram’s promises would be impossible to implement. Grams would eventually be resold to US citizens, and, in any case, the “TON Blockchain was designed and is intended to grant anonymity to those who purchase or sell Grams,” wrote Castel in an opinion and order letter.
“Telegram does not show how withholding the TON Wallet from self-reported U.S. users, who are otherwise anonymous and could simply disclaim having a U.S.-based address, would be efficacious or enforceable,” he wrote.
“Therefore, any restriction as to whom a foreign Initial Purchaser could resell Grams would be of doubtful real-world enforceability,” he concluded.
Nic Carter, a partner of Castle Island Ventures, agreed. He told Decrypt, “because crypto rails are global, once you allow secondary issuance, there is virtually no way to stop US individuals getting their hands on TON.”
Yankun Guo, a partner of US law firm Goldstein & McClintock, said that Telegram should have made this argument in opposition to the preliminary injunction; it might be too late to make that argument now, she told Decrypt.
In his response today, “Judge Castel pointed out that ship has sailed,” said Guo.
Kicked while down
The SEC wants Telegram to return the $1.7 billion to investors, emptying the coffers of Telegram, which has poured much of its resources into developing the blockchain network.
Its creators, billionaires Pavel and Nikolai Durov, previously founded the immensely successful Russian social network VKontakte. Then, they put their fortunes into Telegram, a free messenger app that has grown to around 300 million users since its 2013 launch.
The hope was that TON would keep Telegram going as cash reserves started to run dry. But Telegram’s hopes were dashed last week when the court sided with the SEC over Telegram, granting yet another request for a preliminary injunction.
In his opinion and order filing, Castel wrote that the SEC “has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities.”
Telegram’s plans are now in the lurch. Due to an idiosyncrasy of its purchasing contracts for Grams, Telegram must return investors’ money if the network doesn’t launch by April 30. That date is fast approaching.
Castel promised to be “mindful” of the April 30 deadline following a court hearing last month.
Editor’s note: This article was updated after publication to include comments from Nic Carter and Yankun Guo.
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