US Court Issues Injunction Stopping Issuance of Gram Tokens

A US District Court has recently sided with the Securities and Exchange Commission (SEC) and issued an injunction preventing Telegram from releasing the Telegram Open Network (TON) blockchain and the Gram token. It is the latest blow to Telegram's ambitious project. Telegram had been planning to release both the blockchain and its native cryptocurrency in April. However, the latest ruling puts an end to that.

The Judgment

Judge P. Kevin Castel of the Southern District of New York ruled that Telegram's plans amounted to offering a security, which would have required them to comply with federal securities laws. In his ruling, the judge said that the SEC had provided its evidence to prove its claims that the plans to issue the Gram token amounted to a securities distribution.

The ruling issued by the judge might be the final nail in the coffin for the TON project. Since its inception, the project has faced fierce opposition from US regulators. For instance, in October 2019, the regulators convinced a judge to issue a temporary restraining order against the project.

In 2019, the SEC went to court and said that Telegram failed to register its upcoming securities distribution with the commission. As a result, the SEC said that Telegram was in contravention of the Securities Act of 1933. When the SEC successfully obtained the temporary injunction, Telegram decided to postpone the launch of TON and Gram to April this year. However, those plans appear to have hit a dead end after the latest ruling. 

Court Applies the Howey Test

While issuing his ruling, the honorable judge said that the issuance of the Gram tokens had met the criteria of the Howey Test. According to the ruling, the court had rejected the characterization given to the Gram token by Telegram. The judge elaborated:

"This case presents a ‘scheme’ to be evaluated under Howey that consists of the full set of contracts, expectations, and understandings centered on the sales and distribution of the Gram."

The court ruled that Telegram did not intend to let the Gram tokens rest with the initial buyers. It noted that the company's intention to have Gram achieve mass-market adoption required that tokens sold in 2018, which represent 58% of the total supply, be distributed to a wider audience than the original 175 investors. 

Consequently, the judge concluded that those who invested in the Gram tokens were looking forward to making a profit. However, Telegram insists that it had sent a notice to investors telling that they should not expect any profits. In the notice, Telegram claimed that the tokens were intended to be simply a medium of exchange. 

Judge Rejects Telegram's Argument

During a hearing in February, the legal representatives of Telegram argued that Telegram would not have managerial control over the Gram tokens. Consequently, it would not have control over the increase in their value, which meant they could not be securities. 

The company claimed that they are like an architect who designs a skyscraper but cannot control what goes inside the complete structure. However, the judge was not convinced by this argument. He has thus issued an injunction against the release of TON and Gram tokens. In his opinion, the issuance would have led to the culmination of the illegality being perpetrated by Telegram. 

Possible Appeal

Telegram plans to appeal the ruling. However, it is unlikely such an appeal would succeed. This injunction will presumably be in place permanently.

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