The Securities and Exchange Commission (“SEC”) seeks to enjoin Telegram Group Inc. and TON Issuer Inc. (collectively “Telegram”) from engaging in a plan to distribute “Grams,” a new cryptocurrency, in what it considers to be an unregistered offering of securities. In early 2018, Telegram received $1.7 billion from 175 sophisticated entities and high net-worth individuals in exchange for a promise to deliver 2.9 billion Grams. Telegram contends that the agreements to sell the 2.9 billion Grams are lawful private placements of securities covered by an exemption from the registration requirement. In Telegram’s view, only the agreements with the individual purchasers are securities. Currently, the Grams will not be delivered to these purchasers until the launch of Telegram’s new blockchain, the Telegram Open Network (“TON”)Blockchain. Telegram views the anticipated resales of Grams by the 175 purchasers into a secondary public market via the TON Blockchain as wholly-unrelated transactions and argues they would not be the offering of securities. The SEC sees things differently. The 175 initial purchasers are, in its view, “underwriters” who, unless Telegram is enjoined from providing them Grams, will soon engage in a distribution of Grams in the public market, whose participants would have been deprived of the information that a registration statement would reveal.

Telegram tried to split a security offering into two parts, neither of which, by itself, had all the components of a security offering. This did not fool anybody.

It's also a crap deal for buyers. If Telegram did an ordinary IPO, you'd get stock, a share in the profits of the company, and voting rights. "Grams" give you none of those things.

Attempts to frame a securities offering as something else are not new. The original Howey case, which defined the law in this area, involved a sale and lease back arrangement of Florida orange groves, with the rights to harvest the oranges being tradeable. Others have tried to pull this stunt with warehouse receipts, chinchillas, minks, diamonds, bullion, pay phones, and condos. The ICO crowd is not as original as it thinks it is.