September 23, 2020

Volume X, Number 267

September 23, 2020

Subscribe to Latest Legal News and Analysis

September 22, 2020

Subscribe to Latest Legal News and Analysis

September 21, 2020

Subscribe to Latest Legal News and Analysis

Let Slip the Dogs of War…the SEC vs. Telegram

SEC to Obtain Telegram Data

2020 got off to a busy start with the U.S. Securities and Exchange Commission (“SEC”) securing an important victory in the ongoing court battle with Telegram Group Inc. (“Telegram”), a popular messaging app which allegedly violated U.S. securities laws by offering a digital asset that was a security without a registration or an exemption from registration with the SEC.  As of a January 13 filing, Gram has agreed to supply all bank records to the SEC.

The Battle Commences

The dispute over bank records is the most recent fight between the SEC and Telegram that started in October 2019 when the SEC filed an enforcement action against the company to prevent an alleged unlawful offer and sale of digital assets that are securities. Telegram and its wholly-owned subsidiary TON Issuer raised capital in early 2018 by selling digital tokens called “Grams,” purportedly to finance the development of a blockchain network – the Telegram Open Network (“TON”) – and to fund the continued operation of the company’s Telegram Messenger mobile messaging application.  TON was supposed to launch by October 31, 2019.

The SEC alleges Telegram continued to sell its tokens after its private placement had been completed and has stated that those sales undercut the argument that the offer and sale of the tokens was exempt under the Securities Act of 1933. The Grams sold were not designed to provide any equity interest or profit sharing in Telegram.  The value of the Grams was to be based on being a network currency on a yet to be released blockchain

Telegram allegedly raised about $1.7 billion by selling 2.9 billion Grams to 171 purchasers worldwide. The SEC claims “[a] large portion of this capital came from U.S. investors: Telegram sold more than 1 billion Grams to 39 U.S. Purchasers, raising $424.5 million from the U.S. market.”

The SEC alleges the sale of Grams violated US securities laws because “the defendants . . . failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that securities laws require.” The SEC claims Telegram violated Section 5(a) and 5(c) of the Securities Act by conducting a public offering of securities without a registration or an exemption from registration. 

The Next Fight in the Battle

The SEC’s latest motion in the case claims Telegram failed to comply with the SEC’s production request by only providing information on credits related to its bank records, without providing access to debits. The motion requested access to Telegram’s bank records to investigate both debits and credits related to the sale of Grams. Initially, in what turned out to be a temporary setback for the SEC, a New York federal judge blocked the SEC from immediately accessing Telegram’s bank record. The court instead requested that Telegram propose a schedule setting out a review plan covering the bank records requested by the SEC to ensure that any disclosures would comply with data privacy laws. On January 10 the SEC filed additional documents with the court including invoices related to commission requests connected to the sale of Grams.

The court ordered Telegram to provide all requested records by February 26. Telegram wasted no time in acquiescing to the decision and on the same day sent a letter stating that all information will be submitted to the court by January 15.  Only time will tell if the documents provided are compliant in the eyes of the SEC and this case is likely to have many more twists and turns in the months ahead.

Telegram has agreed not to offer or sell any more Grams until the conclusion of a hearing scheduled for February 18 and 19 to determine if Grams are securities that are subject to the SEC’s jurisdiction.  Telegram has not launched the TON where the Grams are to be used and has indicated the TON network may not be integrated into the popular Telegram Messenger after launch.   Without the connection to the messenger, its millions of users may question the Gram’s value proposition. 

The Eye of Sauron is Upon You – SEC to focus on Cryptocurrency and FinTech in 2020

The SEC’s Division of Trading and Markets Office of Compliance Inspections and Examinations (“OCIE”) released its annual examination priorities for 2020.  OCIE indicated financial technology (“FinTech”) will be an area of focus this year.

OCIE plans to consider six factors when reviewing digital assets: “(1) investment sustainability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities.”  

OCIE examinations do not always lead to SEC investigations and enforcement actions. However, FinTech firms should recognize the examination priorities letter is a clear signal the SEC will continue to monitor blockchain and digital assets in 2020.

I Come From a Land Down Under

The Reserve Bank of Australia (“RBA”) ended 2019 by focusing on Facebook’s Libra payment token. In an official submission before an Australian Senate inquiry into FinTech, the RBA discussed its concerns with FinTech and digital assets. While noting that innovations in payment systems could boost the Australian economy and allow for a movement toward a more substantial digital economy, the RBA raised questions about the stability of a global cryptocurrency. The RBA stated that it did not envision cryptocurrencies like Bitcoin having success in Australia due to their volatile nature. However, on a positive note, the RBA stated that it is “all-in” on the use of stablecoins in Australia.

The RBA indicated that it has been working with Facebook to on the regulation of Libra, noting that “Libra has the potential to become widely used given the involvement of various companies such as Facebook that may be able to leverage their large existing user bases and technological capabilities.”

Hope Springs Eternal – Eternal Sunshine of Spotless Minds

Another year and hope springs eternal.  In this highly contentious election year, another draft bill is circulating in the U.S. Congress.  The principal aim of the Currency Act of 2020 is to divide digital assets in to three categories: crypto-commodities, crypto-securities, and cryptocurrencies and for each to have an assigned regulator.  Cryptocurrencies would be defined as a “representations of United States currency or synthetic derivatives resting on a blockchain or decentralized cryptographic ledger.”  Under such a definition Bitcoin would not be considered a cryptocurrency.  The Currency Act follows other proposed and currently languishing proposed legislation, including the Token Taxonomy Act of 2019, which was introduced in April 2019, but did not move beyond referral to the House Financial Services Committee. Unlike the 2020 Act, the Token Taxonomy Act is most known for its attempt to exclude certain digital assists from the purview of the securities laws.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 21


About this Author


Richard Levin brings his experience as a senior legal and compliance officer on Wall Street and in London to bear in advising clients on corporate, securities and regulatory issues. A problem-solver by nature, his practice focuses on helping financial services and technology (FinTech) clients identify and address regulatory issues as they build their businesses.  

The FinTech sector is experiencing rapid changes that are producing innovative new technologies: digital currencies, blockchain technology, peer to peer lending, robo advisors, crowdfunding portals, and...

Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation

Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with all types of clients, specifically, asset managers, hedge funds, private equity firms, and global financial institutions that seek him out for his legal understanding, business sense, responsiveness, and care for client needs. 

Together with the other lawyers in Polsinelli’s renowned FinTech and Regulation practice, Stephen represents, investors, issuers and underwriters looking for market leading perspectives,  on cutting edge utilization of blockchain technology including investing in cryptocurrency and initial coin offerings (ICO’s). 

Stephen has experience with general financings, lending, and other corporate transactions. He has also counseled clients in the negotiation of total return swaps, credit default swaps, and other structures for the purchase and/or financing of loan and claim portfolios as well as formation and structuring work for startup companies and funds.

Admitted to practice in New York and as a solicitor in England and Wales, Stephen has significant experience advising on cross-border distressed trading matters and is recognized for this in the 2016 edition of IFLR1000as a Rising Star. In February 2017, Stephen received the UJA-Federation of New York’s James H. Fogelson Emerging Leadership Award for his contributions to the New York legal and philanthropic communities. Stephen is recognized as a thought leader frequently writing and speaking on the FinTech and distressed loan trading.

Daniel L. McAvoy Shareholder Investment Funds Securities & Corporate Finance Mergers, Acquisitions and Divestitures Corporate and Transactional Joint Ventures and Strategic Alliances

Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

Carter D. Gage Associate Corporate and Transactional Investment Funds

As an associate in the Corporate and Transactional practice, clients rely on Carter Gage to deliver a wide range of legal services during the life cycle of the client’s business. His practice focuses on advising clients on mergers and acquisitions and general corporate and transactional matters, ranging from selecting the appropriate choice of entity to dispositions and exit strategy. 

Carter focuses on building quality relationships with clients in order to better understand their needs and better project what issues their businesses might encounter in the future. He believes that...