You can Google the legal arguments, but suffice it to say that the legislation creating the SEC is old and vague, and anyone, including the SEC, who says that their characterization of tokens is absolutely correct is misleading you.

Also, the SEC is notorious for their intransigence even after multiple courts and even the Supreme Court have repeatedly rejected their legal interpretations. One example is their definition of insider trader--their definition of insider trading is far more expansive than courts will accept. When you take insider trading courses at a corporation, you're typically being taught the SEC definition, not the legal definition accepted by Federal courts.

Normally companies are risk adverse and aren't keen to piss off the SEC, so they play along. Nobody wants the SEC snooping around as there are invariably minor infractions to be found, especially at a large company. But sometimes, as with Telegram, companies will push back heavily when they want to aggressively pursue some profit opportunity. This doesn't mean these companies are willfully ignoring the law or aggressively pushing the envelope, as is often the case in other areas of regulatory law, e.g. Uber. Rather they're just not willing to placate the SEC. Their legal counsel might otherwise sincerely believe that the company's actions are well within the bounds of the actual law.

>You can Google the legal arguments, but suffice it to say that the legislation creating the SEC is old and vague, and anyone, including the SEC, who says that their characterization of tokens is absolutely correct is misleading you.

You've got that backwards. It's the crypto boosters who really, really, really want to avoid securities regulations who are misleading you with nonsensical, contorted non-arguments.

The SEC's characterization of tokens is absolutely correct, and the only people telling you otherwise are those who had hoped to make a buck off of avoiding regulatory scrutiny.

>This doesn't mean these companies are willfully ignoring the law or aggressively pushing the envelope

Yes, it does, without question. The companies doing this are trying to run exactly the sorts of scams and schemes that the laws were designed to protect against.

In this case, the SEC's reasoning looks very reasonable. Telegram is offering contracts that entitle buyers to Grams (digital coins) after the TON Network is developed. People who buy this contract are funding the development of the TON Network, in the hopes that they will obtain a cut of the created value, in the form of Grams.

These contracts are very similar to shares. They're an investment vehicle used to fund a company, which pays off if the company creates something of value. It's the SEC's job to regulate that sort of thing.

The legislation is vague enough, and the possible characterizations of tokens numerous enough, that there are invariably many reasonable interpretations. So it's not like the SEC is necessarily playing fast & loose either, except to the extent they want you to believe it's a slam-dunk. The SEC aggressively leverages that vagueness, but the reality is that vagueness usually benefits the defendant, especially with an increasingly conservative Supreme Court. OTOH, the approach used for SEC case law going back to 1934 is unique, so SEC-related decisions don't always track the direction of administrative law generally. Securities law is like its own quasi common law, a vestige of the tectonic shifts during the Great Depression and Roosevelt era, which makes it somewhat unique in the domain of Federal administrative and criminal law. Unless you really dig down, it's often the case that two sides have drastically different interpretations which are nonetheless both objectively reasonable on their face.

Though maybe it is a slam-dunk. I'm not a practicing lawyer, and certainly not an expert in securities law. I just have enough background knowledge and legal education to know that when it comes to SEC enforcements the legal landscape is often contentious, and that the SEC has a well-known M.O. It's just something to keep in mind as an outsider.

All SEC does is creating jobs for lawyers, fake sense of safety for amateur investors and a vulnerability in every business so it can be exploited once that becomes a profitable idea. Did you know everything is securities fraud?[1]

[1] https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...]

In the SEC's defense, they're tiny and woefully underfunded. That's why they always come out swinging hard, and are so intransigent. They want interpretations that make it easy for them to penalize and convict. Big companies have enough legal resources, as well as enough pull in Washington, to wipe the floor with the SEC unless the law is crystal clear in the SEC's favor. The SEC is hardly the only regulatory agency that wants easier convictions, or is fearful of lobbyist pushback, but it's a perpetual issue with the SEC, and the situation is peculiarly and qualitatively unique.

If the SEC gives a small investor an inch, the big financial houses will extend that into a parsec. And those companies are constantly watching for those opportunities. So, yeah, the SEC isn't shy about picking a fight with the little guys because they only pick fights they think they can win, preferably outside court; the consequences of losing a fight are huge. This strategy isn't unique to the SEC, but it's uniquely consequential to their authority and effectiveness in general. It's an unfair situation all around, but at the end of the day responsibility falls on Congress.

In any event, my point was that if the situation seems confusing, it almost certainly is a confusing situation without any obvious answers.

That explains how they won those cases against small fry like Madoff and Martha Stewart.

Those were exceptionally (almost laughably) easy cases and, IMO, make my point. The hard ones were the myriad cases of ratings and other deceitfulness that led up to the 2008 financial crisis. Only a single top banker was successfully criminally prosecuted, and the list of settlements was infamously underwhelming: https://en.wikipedia.org/wiki/List_of_major_SEC_enforcement_...

For further reading see https://www.propublica.org/article/the-rise-of-corporate-imp... and https://www.theatlantic.com/magazine/archive/2015/09/how-wal...

The headline is clickbait. The article's actual claim is that scandals a torts are securities fraud.

From the SEC's filing:

> Grams are securities because the Initial Purchasers and subsequent investors expect to profit from Telegram’s work: the development of a TON “ecosystem,” integration with Messenger, and implementation of the new TON Blockchain. Grams are not a currency because, among other things, there are not any products or services that can be purchased with Grams. Rather, there is an expectation on the part of investors that they will profit if Telegram builds out the functionalities it has promised.

It continues:

> The definition of a “security” includes a wide range of investment vehicles, including “investment contracts.” Investment contracts are instruments through which an individual invests money in a common enterprise and reasonably expects profits or returns derived from the entrepreneurial or managerial efforts of others. In a variety of circumstances, courts have found that novel or unique investment vehicles constitute investment contracts, including interests in orange groves, animal breeding programs, railroads, airplanes, mobile phones, and enterprises existing only on the Internet. As the U.S. Supreme Court has noted, Congress defined “security” broadly to embody a “flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

Your first quote is interesting, as that definition fits quite well collectible items. As the brand grows the value of the collectible also grows, and the collectible is purchased to make profit (or can be purchased to make profit; maybe I do the reverse and by GRAM just for the fuzzy feeling it gives me). Yet we do not see such actions taken against companies that produce collectibles.

This is probably because when adding the second, you see there is a major theme of profit redistribution. In all of those cases profit is collected centrally and then redistributed. With a collectible or a token such as gram it is not -- the item may become more valuable, partially due to activities of the creator, but it is not a profit sharing scheme.

So... do Telegram's tokens grant you some definite share of their future profits? You're giving them money, but there is no legal recourse to claim a return from what I can see.

Collectables usually fail the "common enterprise" prong of the Howey test. Unless the operator is manipulating the market. Then, trouble. "In a fraudulent business scheme based upon the secret and dramatic manipulation of collectible stamp values, Escala and its former CEO, Manning, violated the antifraud and reporting provisions of the Exchange Act...."[1]

[1] https://www.sec.gov/litigation/complaints/2009/comp20965.pdf

I'm not a lawyer, but I think if you marketed a collectible as valuable to US residents because its price will rise due to your efforts to promote the associated brand, you would come under SEC jurisdiction by passing the Howey test.

> So... do Telegram's tokens grant you some definite share of their future profits?

Effectively, yes. People who buy these contracts are funding the development of the TON Network. The promised reward is in the form of digital coins on that yet-to-be-developed network. The contract only pays off if Telegram's development succeeds. It's effectively an investment in Telegram.

So it sounds like a kickstarter. Does the SEC regulate those? Realize the IRS has ruled cryptocurrency isn't any different than property.

It looks like they claim they are allowed to (https://www.sec.gov/smallbusiness/exemptofferings/regcrowdfu...) but at the same time in various businesses it is normal to take the money before a thing is built, that's just usually how it has to work.

Kickstarter doesn't give any money back to funders; they get a pre-defined good based on how much they give.

There is no reasonable expectation of profit for people funding via Kickstarter.

If someone would make a kickstarter that'd promise money returns, then yes, SEC would get involved.

Yeah, and Telegram doesn't promise any return as far as I can tell.

Telegram promises Grams (digital coins), to be delivered once the TON network is operational. Telegram even projects what the price of a Gram will be on the market.

This is a vehicle for investing in Telegram's business. If you buy this contract, you're giving Telegram money, which they promise to use to develop a new service. They promise to give you a cut of the value created by that new service. This is very much like a stock offering.

Collectibles are not exclusively purchased to be resold at a higher price ad infinitum. They are at least physical items.

>Collectibles are not exclusively purchased to be resold at a higher price ad infinitum.

Neither is crypto.

I use it to buy real things all the time.

Usually at a significant price discount, to boot!

In this case the SEC mentioned that there is nothing you can buy with Grams and there won't be for the near future. All you could do with Grams is trade them on exchanges.

Cryptocurrency. This is about crypto tokens.

A large number of people "invest" in collectibles only to resell them for a higher price. See: beany babies, trading card games, figurines, dolls. Just like those items tokens can be owned though their representation isn't much to look at. I'm not sure that is a useful distinction, unless you can explain further? E.g. why doesn't it apply to intellectual property?

I keep getting downvoted -- I'm not arguing that Telegram has a workable business plan, just that this isn't really something the SEC can regulate.

You can put collectibles on a shelf to impress likeminded friends. Or to feel happy. You can only trade securities and other similar assets. Also, generally if everyone bought figures to resell... I dont know how that can work... There is always an "unlucky fool" who buys from "scalpers" and keeps the item.

How about virtual collectibles in MMOs?

If purchased to resell, then yes it should be and already is mostly made illegal/breach of TOS.

People can buy things to enjoy, not just to resell.

> I've always been kind of confused as to how the SEC has jurisdiction on this

Because they ask for real money for merely handle you a digital certificate that, the main purpose of which is to wait it to shoot higher to sell for a profit?

Edit: Thanks for the downvote to validate this claim ;)

The issuing company needs to have already built the infrastructure that the token commoditizes, otherwise its a speculative investment, even if the token is just a voucher or grants access to a service.