Case 1:19-cv-09439-PKC Document 71 Filed 01/15/20 Page 1 of 57
`Case 1:19-cv-09439—PKC Document 71 Filed 01/15/20 Page 1 of 57
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`UNITED STATES DISTRICT COURT
`
`SOUTHERN DISTRICT OF NEW YORK
`____________________________________ X
`
`SECURITIES AND EXCHANGE COMMISSION, :
`-
`
`19 Civ. 9439 (PKC)
`
`Plaintiff,
`
`-against-
`
`ECF Case
`
`Electronically Filed
`
`TELEGRAM GROUP INC. and TON ISSUER
`
`INC.,
`
`Defendants.
`____________________________________ X
`
`DEFENDANTS’ MEMORANDUM OF LAW (1) IN SUPPORT OF
`
`THEIR MOTION FOR SUMMARY JUDGMENT AND (2) IN OPPOSITION
`TO PLAINTIFF’S APPLICATION FOR A PRELIMINARY INJUNCTION
`
`SKADDEN, ARPS, SLATE,
`MEAGHER & FLOM LLP
`
`George A. Zimmerman
`Scott D. Musoff
`
`Christopher P. Malloy
`Alexander C. Drylewski
`Four Times Square
`New York, New York 10036
`Phone: (212) 735-3000
`
`Attorneysfor Defendants
`
`

`

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`Case 1:19-cv-09439—PKC Document 71 Filed 01/15/20 Page 2 of 57
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`TABLE OF CONTENTS
`
`PRELIMINARY STATEMENT ..................................................................................................... l
`
`FACTUAL AND PROCEDURAL BACKGROUND ..................................................................... 8
`
`A.
`
`B.
`
`Blockchains and Digital Currencies ......................................................................... 8
`
`Telegram Determines To Create a Better Blockchain ............................................. 9
`
`l.
`
`2.
`
`3.
`
`4.
`
`5.
`
`Telegram and Its Founders........................................................................... 9
`
`The TON Blockchain and Grams .............................................................. 10
`
`Telegram Conducts a Private Placement To Fund the TON
`Blockchain ................................................................................................. l l
`
`The Private Placement Materials ............................................................... l3
`
`The Purchase Agreements .......................................................................... 15
`
`C.
`
`Development of the TON Blockchain ................................................................... l7
`
`1.
`
`2.
`
`The TON Foundation and TON Wallet ..................................................... 18
`
`The TON Beta Version .............................................................................. 19
`
`Public Communications With Potential Gram Purchasers .................................... 19
`
`Telegram Seeks Guidance From the SEC and the SEC Brings Suit...................... 20
`
`D.
`
`E.
`
`ARGUMENT ................................................................................................................................. 22
`
`I.
`
`GRAMS WILL NOT BE SECURITIES FOLLOWING LAUNCH OF THE TON
`
`BLOCKCHAIN ................................................................................................................. 22
`
`A.
`
`Gram Purchasers Will Not Have an Expectation of Profits Based on the
`Managerial Efforts of Others ................................................................................. 25
`
`l.
`
`2.
`
`Grams Were Designed and Promoted for Consumptive Use .....................25
`
`Any Expectation of Profits Will Not Be Based on Telegram’s
`Efforts ........................................................................................................ 28
`
`(a)
`
`(b)
`
`Telegram Has Disclaimed Any Promise of Future Efforts ............28
`
`Any Profits Based on Speculative Trading Are Insufficient
`To Turn Grams Into Securities ...................................................... 30
`
`

`

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`(c)
`
`Any Future Efforts By Telegram Would Not Be “Essential” ........32
`
`B.
`
`There Will Be No “Common Enterprise” in Grams Following Launch ................ 34
`
`1.
`
`2.
`
`No Horizontal Commonality...................................................................... 35
`
`No Vertical Commonality .......................................................................... 37
`
`Whether Grams Are Securities Depends on Their Circumstances After
`Launch of the TON Blockchain ............................................................................. 39
`
`The SEC’s Failure To Provide Clarity and Fair Notice Regarding Its
`Claims Weighs in Favor of Defendants .................................................................41
`
`C.
`
`D.
`
`II.
`
`DEFENDANTS’ PRIVATE PLACEMENT DOES NOT CONSTITUTE A
`
`“PAST VIOLATION” OF THE SECURITIES ACT ........................................................ 42
`
`A.
`
`B.
`
`The Private Placement Was Conducted Pursuant to Valid Exemptions
`Under Rule 506 ...................................................................................................... 42
`
`Defendants Are Entitled to a Valid Exemption Under Section 4(a)(2) of
`the Securities Act ................................................................................................... 45
`
`III.
`
`THE SEC’S APPLICATION FOR AN INJUNCTION SHOULD BE DENIED ............. 47
`
`CONCLUSION .............................................................................................................................. 48
`
`ii
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`

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`TABLE OF AUTHORITIES
`
`
`CASES
`
`Anderson v. Liberty Lobby, Inc.,
`477 US. 242 (1986) ........................................................................................................... 22
`
`Avenue Capital Management II, L.P. v. Schaden,
`843 F.3d 876 (10th Cir. 2016) ........................................................................................... 24
`
`Berman v. Dean Witter & Co.,
`353 F. Supp. 669 (CD. Cal. 1973) .............................................................................. 31, 36
`
`Charette v. Town of Oyster Bay,
`159 F.3d 749 (2d Cir. 1998)...............................................................................................48
`
`In re Coinfltp, Inc.,
`CFTC Dkt. No. 15-29, 2015 WL 5535736 (CFTC Sept. 17, 2015) .................................. 31
`
`Columbia Natural Resources, Inc. v. Tatum,
`58 F.3d 1101 (6th Cir. 1995) .............................................................................................41
`
`Commodity Futures Trading Commission v. McDonnell,
`287 F. Supp. 3d 213 (E.D.N.Y. 2018) ............................................................................... 31
`
`De Luz Ranchos Investment, Ltd. v. Caldwell Banker & Co.,
`608 F.2d 1297 (9th Cir. 1979) ........................................................................................... 36
`
`Demarco v. Lapay,
`No. 2:09-CV-190 TS, 2009 WL 3855704 (D. Utah Nov. 17, 2009) .................................36
`
`Frederiksen v. Poloway,
`637 F.2d 1147 (7th Cir. 1981) ..................................................................................... 25, 26
`
`Gordon v. Terry,
`684 F.2d 736 (11th Cir. 1982) ....................................................................................... 6, 31
`
`Gugick v. Melville Capital LLC,
`No. 11-cv-6294 (CS), 2014 WL 349526 (S.D.N.Y. Jan. 31, 2014)................................... 38
`
`Happy Investment Group v. Lakeworld Properties, Inc.,
`396 F. Supp. 175 (ND. Cal. 1975) .................................................................................... 30
`
`Hirsch v. duPont,
`396 F. Supp. 1214 (S.D.N.Y. 1975), afl’d sub nom., 553 F.2d 750 (2d Cir. 1977)........... 23
`
`iii
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`

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`Holt v. Continental Group, Inc.,
`708 F.2d 87 (2d Cir. 1983).................................................................................................48
`
`International Brotherhood of Teamsters, Chaufleurs, Warehousemen & Helpers of
`America v. Daniel, 439 U.S. 551 (1979) ............................................................4, 23, 24, 32
`
`Landreth Timber Co. v. Landreth
`
`471 U.S. 681 (1985) ........................................................................................................... 24
`
`Lavery v. Kearns,
`792 F. Supp. 847 (D. Me. 1992) ........................................................................................36
`
`Marine Bank v. Weaver,
`455 U.S. 551 (1982) ..................................................................................................... 24, 32
`
`Marini v. Adamo,
`812 F. Supp. 2d 243 (E.D.N.Y. 2011) ......................................................................... 38, 39
`
`McCurnin v. Kohlmeyer & Co.,
`340 F. Supp. 1338 (ED. La. 1972) .................................................................................... 36
`
`Neuwirth Investment Fund, Ltd. v. Swanton,
`422 F. Supp. 1187 (S.D.N.Y. Nov. 17, 1975) ....................................................................46
`
`Noa v. Key Futures, Inc.,
`638 F.2d 77 (9th Cir. 1980) ......................................................................................... 31, 36
`
`Park Yield LLC v. Brown,
`No. 18 Civ. 1947 (GBD) (SN), 2019 WL 6684127 (S.D.N.Y. Dec. 6, 2019) ...................46
`
`Revak v. SEC Realty Corp.,
`18 F.3d 81 (2d Cir. 1994)............................................................................................. 35, 36
`
`Rodriguez v. Banco Central Corp.,
`990 F.2d 7 (lst Cir. 1993) ............................................................................................29, 30
`
`Schwartz v. Bache & Co.,
`340 F. Supp. 995 (SD. Iowa 1972) ............................................................................. 31, 32
`
`Seagrave Corp. v. Vista Resources, Inc.,
`534 F. Supp. 378 (S.D.N.Y. 1982) .................................................................................... 24
`
`SEC v. Aqua-Sonic Products Corp.,
`687 F.2d 577 (2d Cir. 1982)............................................................................................... 23
`
`iv
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`

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`SEC v. Belmont Reid & Co.,
`794 F.2d 1388 (9th Cir. 1986) ............................................................................... 30, 31, 33
`
`SEC v. Blockvest, LLC,
`No. 18CV2287-GPB(BLM), 2019 WL 625163 (S.D. CaL. Feb. 14, 2019), 2019
`WL 625163 (S.D. Cal. Feb. 14, 2019) ................................................................................. 2
`
`SEC v. Cavanagh,
`155 F.3d 129 (2d Cir. 1998)...............................................................................................47
`
`SEC v. Edwards,
`540 U.S. 389 (2004) ........................................................................................................... 27
`
`SEC v. Glenn W. Turner Enterprises, Inc.,
`474 F.2d 476 (9th Cir. 1973) ....................................................................................... 28, 32
`
`SEC v. Life Partners, Inc.,
`87 F.3d 536 (DC. Cir. 1996) ............................................................................................. 23
`
`SEC v. Petrofunds, Inc.,
`414 F. Supp. 1191 (S.D.N.Y. 1976) ...................................................................................48
`
`SEC v. R.G. Reynolds Enterprises, Inc.,
`952 F.2d 1125 (9th Cir. 1991) ........................................................................................... 26
`
`SEC v. Ralston Purina Co.,
`346 U.S. 119 (1953) ...........................................................................................................46
`
`SEC v. Shavers,
`No. 4:13-CV-416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013) ...................................... 27
`
`SEC v. Thompson,
`732 F.3d 1151 (10th Cir. 2013) ......................................................................................... 23
`
`SEC v. Unifund SAL,
`910 F.2d 1028 (2d Cir. 1990).............................................................................................47
`
`SEC v. United Benefit Life Insurance Co.,
`387 U.S. 202 (1967) ..................................................................................................... 24, 40
`
`SEC V. W..]. Howey Co.,
`328 U.S. 293 (1946) ................................................................................................... passim
`
`Sinva, Inc. v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,
`253 F. Supp. 359 (S.D.N.Y. 1966) .............................................................................. 30, 32
`
`

`

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`Svets v. Osborne Precious Metals Co.,
`No. C 92-0357 BAC, 1992 WL 281413 (N.D. Cal. June 8, 1992) .................................... 31
`
`Teague v. Bakker,
`139 F.3d 892 (4th Cir. 1998) ....................................................................................... 24, 27
`
`United Housing Foundation, Inc. v. Forman,
`421 US. 837 (1975) ..................................................................................................... 23, 25
`
`United States v. Faiella,
`39 F. Supp. 3d 544 (S.D.N.Y. 2014) .................................................................................. 27
`
`United States v. Johnson,
`700 F.2d 163 (5th Cir.), on reh ’g, 718 F.2d 1317 (5th Cir. 1983) ..................................... 23
`
`United States v. Leonard,
`529 F.3d 83 (2d Cir. 2008)................................................................................................. 23
`
`United States v. Ulbricht,
`31 F. Supp. 3d 540 (S.D.N.Y. 2014) .................................................................................. 27
`
`Wals v. Fox Hills Development Corp.,
`24 F.3d 1016 (7th Cir. 1994) ............................................................................................. 36
`
`Walsh v. International Precious Metals Corp.,
`510 F. Supp. 867 (D. Utah 1981) ....................................................................................... 32
`
`Warfield v. Alaniz,
`569 F.3d 1015 (9th Cir. 2009) ........................................................................................... 24
`
`Woodward v. Terracor,
`574 F.2d 1023 (10th Cir. 1978) ......................................................................................... 36
`
`Zelnik v. Fashion Institute of Technology,
`464 F.3d 217 (2d Cir. 2006)............................................................................................... 22
`
`w
`
`15 U.S.C. § 78c(a)(10) ................................................................................................................... 27
`
`
`RULES
`
`Fed. R. Civ. P. 56(a) ...................................................................................................................... 22
`
`Vi
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`

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`REGULATIONS
`
`17 C.F.R. § 230.501(a)(1)—(5) ........................................................................................................42
`
`17 C.F.R. § 230.502 ................................................................................................................. 42, 47
`
`17 C.F.R. § 230.502(d) ..................................................................................................................44
`
`17 C.F.R. § 230.506 ....................................................................................................................... 42
`
`31 C.F.R. § 1010.100(ff)(8)(ii) ...................................................................................................... 28
`
`SEC Release No. 33-5347 (1973) .................................................................................................... 3
`
`SEC Release No. 33-6188 (1980) .................................................................................................... 3
`
`Offshore Offers and Sales, Securities Act Release No. 6863, Exchange Act Release No.
`27,942, Investment Company Act Release No. 17,458, 46 SEC Docket 52 (Apr.
`24, 1990) ............................................................................................................................47
`
`Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities
`Act of 1933, Making Finding, and Imposing a Cease-and Desist Order, In re
`Block. one ............................................................................................................................ 34
`
`OTHER SOURCES
`
`Currency, Black’s Law Dictionary
`(10th ed. 2014) ................................................................................................................... 27
`
`Nikhilesh De & Mahishan Gnanaseharan,
`SEC Chief Touts Benefits of Crypto Regulation, CoinDesk (Apr. 6, 2018, 11:58
`UTC) ..................................................................................................................................40
`
`Letter to Cipher Technologies Management LP, Brent J. Fields, Assoc. Dir., Disclosure
`Review and Accounting Office, Sec. Exch. Comm’n (Oct. 1, 2019) ................................ 26
`
`Speech, William Hinman, Dir., Sec. Exch. Comm’n Div. Corp. Fin.,
`Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018), ..... 7, 24, 41
`
`Sec. Exch. Comm’n, Frameworkfor “Investment Contract” Analysis
`ofDigital Assets ...................................................................................21, 21, 24, 28, 40, 41
`
`Press Release No. 8051-19, Heath P. Tarbert, Chairman, U.S. Commodity Futures
`Trading Comm’n (Oct. 10, 2019) ...................................................................................... 31
`
`vii
`
`

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`Defendants respectfully submit this memorandum of law (1) in support of their motion
`
`for summary judgment and (2) in opposition to the application for a preliminary injunction filed
`
`by Plaintiff Securities and Exchange Commission (“SEC”).
`
`PRELIMINARY STATEMENT
`
`This non-fraud action presents the narrow legal question of whether Defendants’ yet-to-
`
`be-issued digital currency, called Grams, constitutes a “security” subject to the US. federal
`
`securities laws. Defendants submit that the SEC has impermissibly stretched its jurisdiction far
`
`beyond what the law allows and that Grams, when launched, will not be a security but rather a
`
`currency or commodity subject to anti-fraud and anti-manipulation oversight by the US.
`
`Commodity Futures and Trading Commission (“CFTC”).
`
`Telegram’s development team began building its highly anticipated blockchain platform,
`
`called the “Telegram Open Network (TON),” in 2017.1 Telegram expects Grams to serve as a
`
`fully functional, “mass-market” digital currency for buying and selling goods and services on the
`
`TON Blockchain upon its launch. Grams have been developed to improve the speed, efficiency
`
`and security of commercial transactions in the US. and globally, and Telegram believes the
`
`technological underpinnings of Grams represent a significant improvement upon existing digital
`
`currencies like Bitcoin and Ether — neither of which has been deemed “securities” by the SEC.
`
`Digital assets, which can take many forms, are a new asset class and the regulatory
`
`landscape is unsettled in many respects, to say the least. At one end of the spectrum, the SEC
`
`has acknowledged that Bitcoin and Ether are commodities, not securities. At the other end of the
`
`
`
`1 Generally, a “blockchain platform” is a peer-to-peer network that records and reflects all transactions on a
`viewable and unalterable system. Many of these networks also allow for the running of “smart contracts” — i.e.,
`programs that automatically execute the terms of an agreement when conditions are met without further input or
`oversight from any party. (See infra p. 10.)
`
`

`

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`Case 1:19—cv-09439—PKC Document 71 Filed 01/15/20 Page 10 of 57
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`spectrum are digital assets that bear the traditional characteristics of securities. For example, in
`
`an initial coin offering (“ICO”), an issuer raises funds to develop a new blockchain or other
`
`product through a public offering where it promises to deliver a digital token when the project is
`
`complete — the investors are pooling risk capital for the project and logically expect to profit
`
`from a successful launch. To date, digital assets that have been deemed securities have involved
`
`public ICOs and/or fraudulent schemes. See, e.g. SEC v. Blockvest, LLC, No. 18CV2287-
`
`GPB(BLM), 2019 WL 625163, at *2 (SD. Cal. Feb. 14, 2019).
`
`Here, in contrast, Telegram has never offered any Grams to the public through an ICO,
`
`and the TON Blockchain will already have been developed by the time Telegram issues any
`
`Grams — indeed, it already is. Instead, Telegram raised capital by privately entering into
`
`purchase agreements (“Purchase Agreements”) with only a select number of high-net-worth,
`
`highly sophisticated purchasers that provided for the future issuance of a currency (Grams), but
`
`only following the completion and successful launch of the open source, decentralized TON
`
`Blockchain (“Private Placement”).2 These Purchase Agreements were expressly treated as
`
`securities and offered pursuant to exemptions to registration under the Securities Act of 1933
`
`(“Securities Act”). If the TON Blockchain does not launch, then Telegram is contractually
`
`required to return unspent funds to the Private Placement purchasers and no Grams will be
`
`created or issued. Once the system is launched, Telegram will not have any ongoing managerial
`
`or entrepreneurial control over it (and in fact has publicly disclaimed any such control).
`
`
`
`2 A “decentralized platform” is one that does not have any central governance, authority or management. Rather,
`the system is managed through the platform’s computer code and across a wide network of computers or nodes that
`act as “validators” of transactions that occur on the system, as is the case with Bitcoin. (Def. 56.1 111] 3-4, 9-11, 16-
`18.)
`
`

`

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`For 18 months leading up to the filing of this action, Telegram attempted to engage with
`
`the SEC and solicit guidance regarding its plans for Grams, including producing thousands of
`
`pages of communications, conducting countless in-person meetings, phone calls and emails, and
`
`even making changes to the contemplated features of the project based on the limited feedback it
`
`obtained. Despite this, the SEC failed to provide meaningful guidance and rushed into this Court
`
`at the eleventh hour to enjoin the launch of the TON Blockchain with the urgency it would
`
`normally reserve for shutting down a boiler room pump-and-dump scheme. This was contrary to
`
`the SEC’s stated desire to engage with developers of digital asset technologies and follows its
`
`prolonged failure to provide any workable guidance in this area, which has led to sharp criticism
`
`by US. lawmakers and one of the SEC’s own commissioners. As Rep. Warren Davidson (R—OH)
`
`publicly expressed, “[t]he SEC is doing a complete patchwork of regulation. No one knows
`
`where they’re going,” and its approach of regulation through enforcement has “all the charm and
`
`inefficiencies of third-world power structures.”3 SEC Commissioner Hester Peirce recently
`
`added: “I am concerned about how the SEC has regulated this space, because I believe our lack
`
`of a workable regulatory framework has hindered innovation and growth .
`
`.
`
`. [and] offer[s] no
`
`clear path for a functioning token network to emerge.”4 The SEC’s pursuit of “regulation
`
`through enforcement” here stands in contrast to past situations where it provided concrete
`
`guidance to resolve uncertainty regarding whether a new asset class fell within the definition of a
`
`security.5
`
`
`
`3 Kollen Post, Rep. Warren Davidson: You Have to Defend Money to Defend Freedom, Cointelegraph (Oct. 22,
`2019), https://cointelegraph. com/news/rep-warren—davidson-you—have-to -de fend-money—to -defend-freedom.
`
`4 Commissioner Hester M. Peirce, Broken Windows: Remarks before the 51st Annual Institute on Securities
`Regulation (Nov. 4, 2019), https://www.sec.gov/news/speech/peirce-broken—windows-51st-annual-institute-
`securities-regulation.
`
`5 See, e. g. , SEC Release No. 33-6188 (1980) (“In an effort to resolve the uncertainty which has developed and
`
`

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`Now, after months of expedited discovery, the undisputed record demonstrates what
`
`was already apparent when the SEC first filed suit: that its claims lack any legal basis. As
`
`detailed herein, the SEC’s theories run counter to longstanding precedent and the undisputed
`
`facts of this case. Defendants are entitled to summary judgment, and the SEC’s request for
`
`injunctive relief should be denied, for at least the following separate and independent reasons.
`
`
`Grams Will Not Be Securities Sub'ect to Federal Securities Laws in ra
`
`: First,
`
`Defendants are entitled to summary judgment because Grams, once they are created upon the
`
`launch of the TON Blockchain, will not fit the definition of “security.” Where an instrument has
`
`“intermingled security and nonsecurity aspects,” it falls within the securities laws only if it has
`
`“substantially the characteristics of a security.” Int’l Bhd. of Teamsters, Chaufi’eurs,
`
`Warehousemen & Helpers ofAm. v. Daniel, 439 US. 551, 560 (1979). Although the SEC
`
`contends that Grams will constitute “investment contracts” under the Supreme Court’s test in
`
`SEC V. W..]. Howey Co., 328 US. 293 (1946), the SEC cannot establish any common enterprise
`
`in Grams or that future Gram buyers will have a reasonable expectation of profits based on the
`
`managerial efforts of others, as Howey requires. Id. at 299.
`
`Indeed, Grams will not entitle purchasers to any income, any dividends, or any interests
`
`in Telegram (or any other entity), nor do they resemble stock or any other form of equity. Rather,
`
`Grams are intended to serve as a bona fide medium of exchange and means for powering
`
`applications on the TON Blockchain, over which Telegram will not have, and in fact has
`
`affirmatively disclaimed, any ongoing control or involvement. This is reflected in Telegram’s
`
`
`
`thereby assist employers and plan participants in complying with the 1933 Act, the Commission has authorized the
`issuance of this release setting forth the views of its Division of Corporation Finance .
`.
`. on the application of the
`Act to [employee benefit] plans”); SEC Release No. 33-5347 (1973) (providing guidance in the face of “uncertainty
`about when offerings of condominiums and other types of similar units may be considered to be offerings of
`securities that should be registered pursuant to the Securities Act”).
`
`

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`Case 1:19—cv-09439—PKC Document 71 Filed 01/15/20 Page 13 of 57
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`communications to potential Gram purchasers and the public, which emphasized that “Grams are
`
`NOT investment products and there should be NO expectation of future profit or gain from the
`
`purchase, sale or holding of Grams,” and that Telegram has “not made any promises or
`
`commitments to develop any applications or features for the TON Blockchain or otherwise
`
`contribute in any way to the TON Blockchain platform after it launches. In fact, it is possible
`
`that Telegram may never do so.” (Infra p. 18.) The TON Blockchain code will be entirely open
`
`source, meaning anyone in the world can access it and build upon it to develop the system. As
`
`Telegram stressed, it “won’t be able to control the blockchain after it launches. Pretty much like
`
`an architect who designed a skyscraper can’t control what happens with the building after it’s
`
`finished — including what gets built around, inside or on top of it.” (Id.)
`
`Aware that Grams themselves do not fit any established definition of security, the SEC
`
`attempts a sleight-of-hand, alleging instead that the sophisticated investors who entered into the
`
`Private Placement expected to profit from Telegram’s pre-launch efforts to build the TON
`
`Blockchain. This is beside the point: whether Telegram’s private placement constituted a
`
`securities offering is not an open question because Telegzam has already treated it as such, and
`
`conducted it pursuant to exemptions to registration under the Securities Act. (See infra pp. 11-
`
`12.) Telegram also does not dispute that the Private Placement investors, who have borne the
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`risk that the TON Blockchain might not launch, expect to profit fiom their purchase of Grams if
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`they are issued. The relevant question here is how Defendants are marketing Grams to potential
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`public buyers and what those buyers’ reasonable expectations will be when Grams are issued
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`upon launch of the blockchain. As a result, the SEC’s focus on private communications between
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`Telegram and Private Placement investors in early 2018, many of which were subject to
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`confidentiality obligations, is completely misplaced (and in fact, the SEC’s actions in filing this
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`lawsuit have done more to draw public attention to such private communications than anything
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`Defendants have done).
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`Even if some Gram purchasers acquire Grams with the expectation of trading them for
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`profit, such expectations will be based on the market value of Grams, which, following the
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`launch of the blockchain, will fluctuate due to market factors and the timing of each individual’s
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`decisions whether to buy or sell — n_ot a common enterprise or the ongoing efforts of Defendants.
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`Courts routinely hold that such speculative trading motive is thus insufficient under Howey, as
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`“[a]n investor who has the ability to control the profitability of his investment [] is not dependent
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`upon the managerial skills of others.” Gordon v. Terry, 684 F.2d 736, 741 (1 1th Cir. 1982).
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`Howey itself provides a useful analogy. There, the defendants pooled funds from
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`investors to develop plots of land into orange groves, offering the investors profits from the sale
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`of oranges through what the Court deemed to be a securities offering. (See infra Section I.C.)
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`Had the Howey defendants registered their offering or conducted it pursuant to an exemption, no
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`one would have claimed that the sale of the oranges themselves violated securities laws.
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`Similarly here, the orange grove has already been developed, and Telegram now intends to
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`distribute the oranges to the investors in the enterprise, at which point the oranges can bought,
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`sold, traded, and used by the recipients as they see fit. Through this action, the SEC has asserted
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`that m the orange grove enterprise (the Private Placement) m the oranges themselves (Grams)
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`are “securities,” even though the oranges will not carry any of the hallmarks of a security or
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`involve any pooling of additional funds. This broad view, which threatens to sweep within the
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`definition of “security” all sorts of consumer goods and products, finds no support in the law and
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`stands in stark contrast to the views of at least one SEC Director, who stated that a digital asset
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`like Grams “all by itself is not a security, just as the orange groves in Howey were not.”6
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`Defendants’ Private Placement Did Not Violate the Securities Act (infla § I! [:
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`Defendants are also entitled to summary judgment regarding the SEC’s claim that they somehow
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`committed a “past violation” of the Securities Act even if Grams will not be a security when
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`issued. Although unclear, the SEC appears to suggest that the Private Placement was in fact a
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`“public distribution” of Grams and that the private purchasers are in fact statutory underwriters
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`because they may sell their Grams in the future. This is belied by the record and common sense.
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`Grams do not exist yet, and may never exist unless the TON platform is successfully launched;
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`thus, there has not been — and can never be — a “public distribution” of a security. Rather,
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`Grams were specifically designed (and intended and understood from the beginning) to be a
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`‘6
`digital currency, not a security, thus defeating the SEC’s past violation” theory.
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`Moreover, the undisputed record reflects that Defendants entered into the Purchase
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`Agreements with only highly sophisticated, high-net-worth accredited investors, through which
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`the purchasers were required to represent and warran