A federal judge has denied Telegram's request to issue its forthcoming gram tokens to non-U.S. investors.
U.S. District Judge P. Kevin Castel, of the Southern District of New York, wrote on Wednesday that Telegram's claim it could issue its tokens to investors but ensure these tokens did not end up in U.S. investors' hands was unconvincing. He rejected a request by the messaging platform to clarify his earlier preliminary injunction preventing any gram issuance.
The order came as the latest stage of Telegram’s six-month court battle with the U.S. Securities and Exchange Commission (SEC), which asked the court to halt the launch of the messaging app company’s blockchain project TON and prevent Telegram from issuing tokens, called grams, to the buyers of its $1.7 billion token sale in 2018.
Citing the lack of SEC’s jurisdiction over the overseas investors, Telegram suggested that it “will implement safeguards to protect against non-U.S. Private Placement purchasers reselling Grams to U.S. purchasers in the future," including a condition that non-U.S. investors can only receive their grams if they are not going to resell them in the U.S., and configuring the digital wallet to cut off Americans.
The argument did not convince the judge, who wrote:
“Focusing upon the Initial Purchasers and their Gram Purchase Agreements misses one of the central points of the Court’s Opinion and Order, specifically, that the 'security' was neither the Gram Purchase Agreement nor the Gram but the entire scheme that comprised the Gram Purchase Agreements and the accompanying understandings and undertakings made by Telegram, including the expectation and intention that the Initial Purchasers would distribute Grams into a secondary public market.”
The judge also was not impressed by the proposed measures to fence off the U.S. investors, writing that Telegram did not actually explain how it could prevent secondary sales or how it could lawfully modify the Gram Purchase Agreements to create this restriction.
“... [F]undamentally, the TON Blockchain was designed and is intended to grant anonymity to those who purchase or sell Grams," he wrote.
Investors "could simply disclaim having a U.S.-based address," he said.
The order also points out that the question of the SEC’s jurisdiction has not been previously raised by Telegram, and said at this point it is too late to consider it.
Gabriel Shapiro, a blockchain and crypto-focused attorney, told CoinDesk the judge apparently understands the nature of blockchain technology quite well and highlighted Telegram's "underplaying the significance of its request for clarity and overplaying the efficacy of its proposed U.S. geofencing."
"I think it's clear that Judge Castel agreed fully with the SEC that Telegram's post-injunction arguments about extraterritoriality are 'too little, too late,'" he said. "His response to Telegram's 'request for clarification' also displays admirable technological savvy and skepticism, as he recognized that Telegram's offer to KYC-gate the TON wallet does not fundamentally limit the distribution of GRAMs through other possible wallets built on the open-source TON blockchain protocol."
Telegram said it would appeal Judge Castel's injunction late last week.
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