SEC Taps 3 Experts on Why Telegram's Token Is a Security
If the SEC wins, early Telegram investors might never see their Grams.
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On Jan. 27, the SEC filed three expert reports in support of its firmly-held position that Telegram’s Gram tokens offered in its 2018 ICO “represented a security when sold and will represent a security when/if delivered.”
Back in 2019, the agency filed an emergency action and obtained a restraining order against Telegram, claiming that the company violated registration provisions of the Securities Act of 1933 by conducting “an alleged unregistered, ongoing digital token offering in the U.S. and overseas.”
Telegram argues that the only thing it “sold” during the ICO was a right to the future delivery of a commodity.
In Telegram’s defense, the company was one of the first to drop the “conventional” ICO model and, in an attempt to avoid a direct collision with U.S. securities laws, employ the SAFT (Simple Agreement for Future Tokens) crowdfunding structure. At the time, legal professionals heralded the agreement as being perfectly compliant with U.S. securities regulations.
The SEC is now arguing it’s impossible to separate the “Purchase Agreements” from the Gram tokens themselves because the Grams are the representation of the holders right to the potential value underlying them.
Experts Weigh in on the Token
On Jan. 27 the SEC filed three reports in support of its position on several key technical and economic aspects of the matter.
Carmen A. Taveras, Ph.D. in economics and financial economist at the SEC, was asked to describe the Reference Price formula, calculate the discounts received by Gram investors in the private placement with respect to the expected Reference Price at the TON Blockchain launch, and opine on Telegram’s ability to guarantee the price stability of Grams.
The SEC’s intention with this report is to show that Gram investors purchased the tokens with expectations of profit. After extensive analysis of Telegram’s public documents, Mr. Taveras arrived at the following conclusions:
- The Reference Price of Grams is given by an exponential formula and is a function of the total number of Grams in circulation — each subsequent Gram is sold at least one billionth of a dollar higher than the previous Gram;
- Gram investors received substantial discounts from the expected Reference Price at launch;
- The TON Reserve’s ability to buy and sell Grams pursuant to the Reference Price formula is not enough to guarantee stability in the market price of Grams.
Moving on to the second testimony report, the SEC asked expert witness Maurice P. Herlihy — Ph.D. in computer science — to examine the code of the “testnet” version of the TON Blockchain and opine on the current state of the TON network.
The expert witness concluded that the current “testnet” version of the code “lacks critical components that would be required in a fully developed and running system” and that the TON Blockchain “is not yet mature enough” to support the suite of apps and services as described in the public documents released by the company.
Lastly, the SEC retained Patrick B. Doody — a blockchain data scientist at the forensic data analytics and economic consulting firm Integra — to independently analyze and opine on the perspective of a reasonable purchaser of Grams.
According to Mr. Doody’s expert opinion, it was reasonable for a purchaser to buy Grams with the expectation of profit derived from the work of Telegram in developing TON’s blockchain ecosystem.
Doubling down on his claim, Mr. Doody states:
“It was unlikely that a reasonable purchaser would acquire Grams in order to purchase goods and services, because, among other reasons, there were no identifiable uses for Grams at the time.”
The third report also points to the fact that Telegram explicitly told potential purchasers they would sell them Grams at substantial discounts to the expected Reference price at the launch of the TON blockchain. Mr. Doody adds:
“Telegram took this price support a step further by telling potential purchasers through its offering documents and the TON Whitepapers that it would establish a procedure for the TON Foundation to repurchase Grams directly if the market price dropped below half the Reference Price.”
Not so Simple After All
Turns out, Simple Agreements for Future Tokens are not so simple after all. Just because tokens have a utility doesn’t make them “commodities.”
The SEC argues that, even if Grams ever turn out to have some form of utility, the reality is that for the initial investors, the tokens served merely as a means to cash out of their investments.
The Commission reports:
“Sophisticated purchasers understood they were buying a speculative but potentially lucrative investment opportunity manifested by Grams—not a consumable commodity like oranges.”
Will Telegram manage to get out of this alive? The next court hearing is scheduled for Feb. 18, 2020.