BitOoda Regulatory Analysis, 4/6/2020: Howey, Telegram, and the Future of Token Offerings
While we at BitOoda typically avoid rehashing the proverbial ‘story of the day’ in the crypto regulatory arena, we would be remiss not to offer some thoughts on the recent ruling in the SEC’s legal dispute with Telegram, given the impact this case is set to have on the digital asset space. The quick summary of this week’s developments is that the federal court overseeing the case granted the SEC’s motion to halt the distribution of Gram tokens, the native currency for the planned TON network. Citing the Howey Test and the SEC’s digital asset classification framework, the court rejected Telegram’s claim that its initial investors purchased the tokens for future “consumptive use” on the TON network, rather than for expected profit from the public sale of the tokens on the secondary market.
Without getting into the legal subtleties of the case, this ruling (if the case continues on its current trajectory) will set an important precedent that will influence the structure and substance of future digital asset offerings, sales, and distributions. The degree to which that impact will shape the broader regulatory landscape for token issuers and developers will depend on their ability to define and defend the “economic realities” of future offerings, including distinguishing private investments vs. sale in a secondary public market, and whether future sales (via or outside the native network) are supported by the issuing company’s ongoing efforts vs. a decentralized user base. And while Friday’s filing of a series of class-action lawsuits against numerous token issuers and exchanges was obviously in the works before last week’s court ruling, the Telegram case could prove to be a catalyst for the increasing classification of tokens as securities.
Beyond the confirmation of SEC’s clear intent to continue scrutinizing and taking action against what it sees as the sale of unregistered securities, a looming question for the crypto community is what the ultimate penalty might be and how it will affect the future of Telegram. The judge in this ruling specifically mentioned the $1.7 billion figure that Telegram raised from the sale, but at this point in the legal process we have no indication of the scale of the potential penalty. Given the tone and magnitude of this case, not to mention the extent to which Telegram has dug in its heels and pushed its arguments forward, we doubt the penalty would be of the same scale as the Block.one case (which settled for a paltry 0.6% of the amount it raised).
As we wait and see how the Telegram case progresses, we continue to explore the benefits of migrating to compliant messaging platforms, as well as providing research and project advisory services to clients looking to utilize BitOoda’s deep industry expertise and our relationships across the digital asset space to compliantly navigate the complex regulatory landscape.