Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 1 of 39
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`SECURITIES AND EXCHANGE COMMISSION, :
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`TELEGRAM GROUP INC. and TON ISSUER INC.,
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`Defendants.
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`19 Civ. 9439 (PKC)
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`ECF Case
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`PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MEMORANDUM OF
`LAW IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT
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`January 13, 2020
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`Jorge G. Tenreiro
`Kevin P. McGrath
`Ladan F. Stewart
`Alison R. Levine
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`Counsel for the Plaintiff
`Securities and Exchange Commission
`New York Regional Office
`Brookfield Place
`200 Vesey Street, Suite 400
`New York, NY 10281
`(212) 336-9145 (Tenreiro)
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 2 of 39
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`TABLE OF CONTENTS
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`TABLE OF AUTHORITIES ...................................................................................................... iv
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`PRELIMINARY STATEMENT ................................................................................................. 1
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`STATEMENT OF FACTS ........................................................................................................... 3
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`I. THE DUROV BROTHERS LAUNCH TELEGRAM MESSENGER. ............................ 3
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`II. TELEGRAM RAISES FUNDS FROM INVESTORS IN AN UNREGISTERED
`OFFERING OF GRAMS. ................................................................................................. 3
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`D.
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`A.
`B.
`C.
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`In Need of Cash, Telegram Decides To Raise Funds for Its Operations. ...............3
`Telegram Targets Investment Funds as Initial Purchasers of Grams. .....................5
`Telegram and Its Agents Market Grams as an Investment in Telegram
`Dependent in Part On Widespread Adoption of Grams for Success. ......................5
`Telegram Leads Investors To Expect Its Continued Support to the TON
`Network and the Demand for Grams after Launch. ................................................8
`Telegram Enters Into Legally Binding Gram Purchase Agreements. .....................9
`E.
`Telegram Builds A Significant Price Discount Into the Price of Grams. ..............11
`F.
`Telegram Claims to Have Raised $1.7 Billion in the Offering. ............................12
`G.
`III. TELEGRAM AND ITS ASSOCIATES MAKE EFFORTS TO INCREASE
`GRAMS’ VALUE AND LIQUIDITY AFTER THE LAUNCH. ................................... 13
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`IV. A SECONDARY MARKET FOR GRAMS DEVELOPS AFTER THE
`OFFERING. ..................................................................................................................... 14
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`V. TELEGRAM DOES NOT REGISTER THE SALE OF GRAMS WITH THE SEC
`OR OTHERWISE PROVIDE INVESTORS WITH CERTAIN INFORMATION........ 15
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`STANDARD OF REVIEW ........................................................................................................ 15
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`ARGUMENT ............................................................................................................................... 16
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`I. TELEGRAM MADE UNREGISTERED OFFERS AND SALES OF SECURITIES. .. 16
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`A.
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`The Howey Analysis Applies as of the Date of the Gram Purchase
`Agreements. ...........................................................................................................18
`1. A “sale” occurs under the Securities Act when the parties become
`irrevocably bound by their agreement. ........................................................ 18
`The Gram Purchase Agreements were legally binding “sales.” .................. 20
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`2.
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 3 of 39
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`B.
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`The Undisputed Facts Establish that the Grams Were Investment
`Contracts When They Were Sold. .........................................................................22
`1.
`Telegram obtained an investment of money. .............................................. 22
`2.
`The Initial Purchasers invested in a common enterprise. ............................ 23
`3.
`The Initial Purchasers reasonably expected profits derived from
`Telegram’s entrepreneurial efforts. ............................................................. 25
`Even If Analyzed At TON’s Launch, Grams Are Investment Contracts. .............26
`C.
`II. TELEGRAM ENGAGED AND IS ENGAGING IN A PUBLIC DISTRIBUTION
`OF GRAMS TO WHICH NO EXEMPTION CAN APPLY .......................................... 27
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`A.
`B.
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`“Distributions” Under the Securities Act and Regulation D .................................28
`Telegram Has Taken Steps Towards, and Seeks to Complete, a Public
`Distribution of Grams ............................................................................................31
`CONCLUSION ....................................................................................................................... 33
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 4 of 39
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`TABLE OF AUTHORITIES
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`Page(s)
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`Cases
`Aaron v. SEC, 446 U.S. 680 (1980) .............................................................................................. 28
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`Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ................................................................. 15
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`Berckely Inv. Group, Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006) ............................................... 29
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`Continental Mktg. Corp. v. SEC, 387 F.2d 466 (10th Cir. 1967) ................................................. 22
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`Delaney v. Bank of Am. Corp., 766 F.3d 163 (2d Cir. 2014)........................................................ 16
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`Dependable Sales & Serv., Inc. v. TrueCar, Inc., 377 F. Supp. 3d 337 (S.D.N.Y. 2019) ............ 15
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`Finkel v. Stratton Corp., 962 F.2d 169 (2d Cir. 1992) ................................................................. 20
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`Geiger v. SEC, 363 F.3d 481 (D.C. Cir. 2004) ............................................................................. 30
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`Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959) ..................................................... 29, 30
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`Grondahl v. Merritt & Harris, Inc., 964 F.2d 1290 (2d Cir. 1992) .............................................. 20
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`Hart v. Pulte Homes of Michigan Corp., 735 F.2d 1001 (6th Cir. 1984) ..................................... 23
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`In re J.P. Jeanneret Assocs., Inc., 769 F. Supp. 2d 340 (S.D.N.Y. 2011) .................................... 23
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`Jaramillo v. Weyerhaeuser Co., 536 F.3d 140 (2d Cir. 2008) ...................................................... 16
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`Lewisohn Copper Corp., 38 S.E.C. 226 (1958) ............................................................................ 29
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`Morales v. Quintel Entm’t Inc., 249 F.3d 115 (2d Cir. 2001) ...................................................... 16
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`Quinn & Co. v. SEC, 452 F.2d 943 (10th Cir. 1971) .............................................................. 28, 30
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`R.A Holman v. SEC, 366 F.2d 446 (2d Cir. 1966) ........................................................................ 29
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`Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir. 1972) .................................. 19, 20
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`Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994) ................................................................ 23
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`Reves v. Ernst & Young, 494 U.S. 56 (1990) ................................................................................ 17
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`Rocky Aspen Mgmt. 204 LLC v. Hanford Holdings LLC,
`230 F. Supp.3d 159 (S.D.N.Y. 2017) ....................................................................................... 24
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`SEC v. Arcturus, 928 F.3d 400 (5th Cir. 2019)............................................................................. 17
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 5 of 39
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`Page(s)
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`SEC v. Cap. Gains Research Bureau, 375 U.S. 180 (1963) ......................................................... 19
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`SEC v. Cavanagh, 1 F. Supp. 2d 337 (S.D.N.Y. 1998), aff’d 155 F.3d 129 (2d Cir. 1998) ......... 29
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`SEC v. Cavanagh, 155 F.3d 129 (2d Cir. 1998) ........................................................................... 28
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`SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) ..................................................................... 16, 28
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`SEC v. Edwards, 540 U.S. 389 (2004) .......................................................................................... 17
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`SEC v. Glenn W. Turner Enter., 474 F.2d 476 (9th Cir. 1973) .................................................... 27
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`SEC v. Infinity Grp. Co., 212 F.3d 180 (3d Cir. 2000) ................................................................. 23
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`SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974) ............................................... 27
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`SEC v. Merchant Cap., LLC, 483 F.3d 747 (11th Cir. 2007) ....................................................... 17
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`SEC v. Ralston Purina & Co., 346 U.S. 119 (1953) .............................................................. passim
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`SEC v. Rubera, 350 F.3d 1084 (9th Cir. 2003) ............................................................................. 22
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`SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001) ................................................................................. 23
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`SEC v. Shields, 744 F.3d 633 (10th Cir. 2014) ............................................................................. 17
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`SEC v. W.J. Howey, 328 U.S. 293 (1946) .............................................................................. passim
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`United Housing Found. v. Forman, 421 U.S. 837 (1975) ...................................................... 17, 27
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`United States v. Lindo, 18 F.3d 353 (6th Cir. 1994) ..................................................................... 29
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`United States v. Wolfson, 405 F.2d 779 (2d Cir. 1968) ................................................................ 30
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`Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008) ....................................................... 19, 20, 22
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`Yoder v. Orthomolecular Nutrition Inst., 751 F.2d 555 (2d Cir. 1985) ........................................ 19
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`Zaccaro v. Shah, 746 F. Supp. 2d 508 (S.D.N.Y. 2010) .............................................................. 16
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`Statutes
`15 U.S.C. § 77b(a)(1) .................................................................................................................... 16
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`15 U.S.C. § 77b(a)(11) ............................................................................................................ 28, 29
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`15 U.S.C. § 77d(a)(1) .................................................................................................................... 29
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 6 of 39
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`Page(s)
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`15 U.S.C. § 77e ...................................................................................................................... passim
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`Other Authorities
`Further Definition of ‘Swap,’ \’Security-Based Swap,’ and ‘Security-Based Swap
`Agreement’, Rel. No. 33-9338, 2012 WL 2927796 (July 18, 2012) ........................................ 20
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`Interpretative Releases Relating to the Securities Act of 1933 and General Rules and
`Regulations Thereunder, Rel. No. 33-5121, 1970 WL 116591 (Dec. 30, 1970) ................ 30, 31
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`Non-public Offering Exemption, Securities Act Rel. No. 33-4552, 1962 WL 69540 (Nov.
`6, 1962) ..................................................................................................................................... 31
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`Securities Offering Reform, 70 F.R. 44722, 44765 n.391 Rel. No. 33-8591, 2005 WL
`1811282 (Aug. 3, 2005) ............................................................................................................ 20
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 7 of 39
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`Plaintiff Securities and Exchange Commission (“SEC”) respectfully submits this
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`memorandum in support of its motion for summary judgment against defendants Telegram
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`Group Inc. and TON Issuer Inc. (collectively “Telegram” or “Defendants”). For the reasons set
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`forth below, the Court should grant the SEC’s motion for summary judgment.
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`PRELIMINARY STATEMENT
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`This case concerns Defendants’ active promotion and sale of “Grams,” a form of digital
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`token that is a security pursuant to SEC v. W.J. Howey, 328 U.S. 293 (1946). In 2018,
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`Defendants effected a purportedly private sale of approximately $1.7 billion worth of Grams,
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`with no registration statement in effect. Accordingly, Defendants violated Section 5 of the
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`Securities Act of 1933 (“Securities Act” or “Act”), 15 U.S.C. § 77e. The SEC now seeks
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`summary judgment for this claim because the relevant transactions, the lack of a registration
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`statement, and the fact that Grams are securities can all be established with undisputed evidence.
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`In Howey, the Supreme Court defined “investment contracts,” and, thus, “securities,” as
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`investments of money into a common enterprise with a reasonable expectation of profits to be
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`derived from the entrepreneurial or managerial efforts of others. Id. at 301. Here, the undisputed
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`evidence shows that the investment contract Defendants marketed to institutional investors in
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`exchange for $1.7 billion was the quintessential transaction where investors funded a company’s
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`growth hoping to profit from its continued efforts and future successes. Telegram solicited these
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`investments by fueling these expectations. It touted the past successes of its founders in this
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`space and the expertise of its programmers and its promised future efforts to build an ambitiously
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`revolutionary “TON network.” And it highlighted the large user base for its preexisting product,
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`Telegram Messenger, and how integrating the network into Messenger could create “demand and
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`value” for the Grams. Telegram also sold Grams at steep discounts from an expected opening
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 8 of 39
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`“reference price,” according to a formula Telegram promised to use to support market prices;
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`promised to and did facilitate trading Grams on digital asset platforms; and made clear it would
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`retain control of a significant amount of Grams. All of this further fed investors’ reasonable
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`expectations of profits from Telegram’s economically-aligned efforts.
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`Given these inducements, objectively reasonable investors who entered into a “Purchase
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`Agreement for Grams” with Telegram knew that, to make a profit, they would need Telegram to
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`deliver on its promised efforts to build the TON network to create value for Grams—otherwise
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`worthless strings of code—and to expand Messenger to foster demand and value for the Grams.
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`All of this was true when Telegram and its investors entered into the sale agreements. At
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`that moment, the investors incurred a legally binding obligation to pay for and receive Grams,
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`and Telegram similarly entered into a legally binding obligation to deliver them. This common-
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`sense understanding—that the “sale” of Grams was completed at that moment—comports with
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`legal precedent and is confirmed by the parties’ behavior. In any event, as explained further
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`below, Grams will remain investment contracts upon delivery.
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`In sum, in determining that the Grams were securities, this Court should look to the
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`economic reality of what Telegram was doing: raising money to build a platform that would
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`create value and profits for the investors. Much like a stock certificate, a Gram represents an
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`asset. Here, when sold to the investors, that asset was an investment contract. And, upon the
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`launch of the TON network, that asset will remain an investment contract. The sale of Grams
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`was not registered and thus violated Section 5 of the Securities Act.1
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`1
`Because it is Telegram’s burden to establish any exemption from registration, the SEC will defer
`addressing, in detail, any claim that the offering was exempt, except to discuss below that Telegram will
`not be able to sustain its burden given that the economic reality of the transaction at issue demonstrates
`that Telegram is engaged in a “distribution” and therefore a statutorily non-exempt “public offering.”
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 9 of 39
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`STATEMENT OF FACTS2
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`I.
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`THE DUROV BROTHERS LAUNCH TELEGRAM MESSENGER.
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`In approximately 2006, Pavel Durov (“Durov”) and his brother founded “VK,” a social
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`media networking application (“app”) that eventually became one of the most widely used in
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`Russia. Stips. at ¶¶ 9, 13.3 Durov later left VK. Id. at ¶ 17.
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`In 2013, Durov and his brother then launched Telegram Messenger (“Messenger”), an
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`app that permits users to communicate in chats or telephone calls, Stips. at ¶¶ 16, 18-19, and is
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`heavily used by people interested in blockchain technology. Id. at ¶ 23. From 2013 through
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`2017, Durov funded Messenger with the proceeds of the VK sale and personal savings. Id. at
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`¶ 17; 56.1 at ¶ 3. During this period, the overwhelming majority of Telegram’s employees’
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`activities were dedicated to Messenger. Stips. at ¶ 23; 56.1 at ¶ 4. Indeed, Durov considers
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`“Telegram” and “Messenger” as synonymous, 56.1 at ¶ 2, and Telegram prides itself on the “size
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`and public perception” of its brand and its ability to create demand for future projects. Id. at ¶ 8.
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`Durov, the CEO of Telegram Group, has owned, directly or indirectly, both entities at all
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`relevant times. Stips. at ¶¶ 1-3.
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`II.
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`TELEGRAM RAISES FUNDS FROM INVESTORS IN AN UNREGISTERED
`OFFERING OF GRAMS.
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`In Need of Cash, Telegram Decides To Raise Funds for Its Operations.
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`A.
`Telegram, emphasizing its privacy features, advertises that it does not share user
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`information with governments—a feature made possible by Telegram’s decision to run its own
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`servers (while directly incurring the costly hosting charges). 56.1 at ¶¶ 6-7. Telegram has also
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`2
`This section sets forth facts undisputed for purposes of this motion. The SEC does not
`necessarily concede each of these facts for all purposes in this action.
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`“Stips.” means the Parties’ Stipulation of Undisputed Facts; “56.1” means Pl.’s Local Rule 56.1
`Statement in Supp. of its Mot. for Summ. J.; “PX” means Exhibits to the Declaration of Ladan Stewart.
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 10 of 39
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`stated on its website that Messenger “is free and will always be free,” and that Telegram is “not
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`going to sell ads or introduce subscription fees,” Stips. at ¶ 21, and has indeed never charged user
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`fees or sold ads or otherwise generated income for Messenger. Id. at ¶¶ 14-15, 20.
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`In 2017, Durov therefore needed “cash” to buy Messenger’s servers and pay for related
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`services. 56.1 at ¶ 16-17. He considered selling traditional voting equity but decided against it,
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`“concerned that [it] would affect the company’s integrity [] its values, and [its] ethos.” Id. at
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`¶¶ 18, 21. Nor did Telegram wish to start charging users or selling ads, believing that doing so
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`would hamper its ability to expand its user base and keep up with competitors. Id. at ¶ 8.
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`Instead, Telegram eventually decided to raise funds by selling digital assets in an ICO,
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`including, by then, to fund a new venture: creating a cryptographically-secured distributed
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`ledger (“blockchain”) and network of applications related thereto that Telegram could integrate
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`into Messenger. Id. at ¶¶ 20, 22-26. Defendants first contemplated a discounted private pre-sale,
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`followed by a public sale and the listing of Grams on digital asset trading platforms. Stips. at
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`¶ 39; 56.1 at ¶¶ 19-20. Telegram later abandoned the private/public approach for the purportedly
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`purely “private” sale at issue in this litigation. Stips. at ¶¶ 40-43, 46-57.
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`Telegram stated it would sell some of its five billion Grams through purchase agreements
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`“to be converted 1:1 to native TON tokens (Grams)” after the launch of a “Telegram Open
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`Network” or “TON” network. 56.1 at ¶ 63. The sale occurred in two rounds, as Telegram had
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`envisioned, but both rounds purported to be private this time (the “Offering”). Stips. at ¶¶ 46-57.
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`The first round started in January 2018 and ended on February 9, 2018 (“Pre-Sale”). Id. at ¶ 46.
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`The second started in February 2018 and was scheduled to end in March 2018, but continued at
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`least through November 2018 (“Stage A”). Id. at ¶ 54; 56.1 at ¶¶ 182-86.
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 11 of 39
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`Telegram Targets Investment Funds as Initial Purchasers of Grams.
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`B.
`Telegram selected Pre-Sale investors based on their “reputation” and “track records” as
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`institutional investors and funds—not based on any knowledge of whether, for example, they
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`intended to eventually use Grams as a “stake” to “validate” new blocks on Telegram’s yet-to-be-
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`created blockchain. 56.1 at ¶¶ 139-46. Of the Pre-Sale and Stage A purchasers (“Initial
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`Purchasers”) based in the United States, most were, by Telegram’s design, institutional investors,
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`or special purpose vehicles created by them, and wealthy individuals—or, as Durov called them
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`“tier-1 firms.” Id. at ¶¶ 173-76. Consistent with their status as funds or investors in the business
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`of funding (and profiting from) new ventures, most, if not all, U.S. Initial Purchasers purchased
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`large quantities of Grams (at significant discounts), for an average investment of approximately
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`$10.1 million each and a minimum investment of $1 million, Stips. at ¶¶ 49, 56, indicative of
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`their intent—confirmed by their internal documents and sworn affidavits—to eventually sell
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`Grams for a profit in the public market. See, e.g., 56.1 at ¶¶ 173-76.
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`C.
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`Telegram and Its Agents Market Grams as an Investment in Telegram
`Dependent in Part On Widespread Adoption of Grams for Success.
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`In late 2017, Telegram began marketing the Offering, first as a public/private then as a
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`“private” offering, with certain “Offering Materials,” including: (1) a two-page and a four-page
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`promotional materials (the “Teasers”), Stips. at ¶¶ 66-70; (2) a “Primer,” a “Pre-Sale Primer,”
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`and a “Stage A Primer,” id. at ¶¶ 75-81; (3) a “Telegram – Indication of Interest” letter
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`(essentially, a term sheet) for each round, id. at ¶¶ 71-74; (4) certain “Purchase Agreement for
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`Grams” (the “Gram Purchase Agreements”), id. at ¶¶ 85-90; (5) various versions of the
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`Whitepaper, id. at ¶¶ 118-120, and (6) “Risk Factors” sheet, id. at ¶¶ 100-104. Many of these
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`documents eventually reached the public. Id. at ¶ 98-99; see also id. at ¶¶ 60-65.
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`5
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 12 of 39
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` Telegram stated in the Offering Materials that it was raising funds to create a
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`“revolutionary” new and potentially massive blockchain ecosystem that would support a “new
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`cryptocurrency” intended to compete with major consumer-transaction giants such as
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`MasterCard and Visa. See, e.g., 56.1 at ¶¶ 56, 78, 85. The Offering Materials outlined this
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`ambitious vision and the significant efforts Telegram would undertake to create an entire
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`blockchain ecosystem integrating multiple platforms and services. Id. at ¶¶ 52, 57, 59-61.
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`The Offering Materials explicitly and variously tied the success of TON to the success of
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`Messenger—that is, of Telegram itself. For example, the materials explained that amounts raised
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`would fund Telegram’s business activities. In the Primer, Telegram explained that “[f]unds
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`raised during the Telegram ICO will be used for the development of Telegram and TON and for
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`the ongoing expenses required to support the growth of the ecosystem.” Id. at ¶ 120; see also id.
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`at ¶ 124 (Pre-Sale Primer: “[w]e intend to use the proceeds raised from the offering for the
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`development of the TON Blockchain, for the continued development and maintenance of
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`Telegram Messenger, and for general corporate purposes . . . .”).
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`In addition, the materials stated that “Telegram will serve as a launch pad for TON,”
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`because Telegram would “integrate” TON into Messenger, to “leverag[e] Telegram’s massive
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`user base and developed ecosystem,” and that this would “leverage [Messenger’s] existing
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`ecosystem of communities, developers, payment providers, and merchants to drive demand and
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`value for [Grams].” Id. at ¶¶ 57, 86-87, 128 (emphasis in original); see also id. at ¶¶ 52, 54, 81-
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`83 (Telegram would use its “engaged base” of Messenger users that “provides pre-existing
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`critical mass necessary for the ecosystem to grow” and to “drive demand and value” for Grams).
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`The materials also projected how “Telegram [could] reach one billion active users by . . . 2022,”
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`which “users can provide the required critical mass” to adopt Grams. Id. at ¶¶ 122, 89-90.
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 13 of 39
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`In making these statements, Telegram also emphasized the past successes and future
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`efforts of its team of “experts.” Its Four-Page Teaser, for example, stated that Telegram would
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`“rely on its 10-year experience in building user-friendly interfaces for tens of millions to build
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`light wallets, markets and identification services that will allow users to get on board with
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`cryptocurrencies,” such that “the TON Wallet can instantly become the world’s most adopted
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`cryptocurrency.” Id. at ¶ 57 (emphasis in original); see also id. at ¶¶ 71, 86, 129.
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`Relatedly, Telegram stated that Grams would have to be widely adopted if they were to
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`achieve Telegram’s stated goal of becoming a “truly mass-market cryptocurrency.” Stip. at
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`¶ 141. Telegram thus proposed integrating TON wallet into Messenger “to encourage a wide
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`adoption of Grams after launch,” id. at ¶ 140 (further suggesting that TON was a way to enhance
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`use of Messenger and vice versa), and Offering participants understood that the venture would
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`not succeed if Grams were not distributed broadly. See PX1-PX8, 56.1 at ¶¶ 28, 173-76.
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`Finally, Telegram did not market the Offering by itself. It paid 10-15% commissions to
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`several entities to find investors. Id. at ¶¶ 318-31. These promoters developed marketing
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`materials, which Telegram—and eventually members of the public as early as February 2018—
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`received. Id. at ¶¶ 320-22, 327-28. The promoters’ marketing materials touted the “[b]ooming
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`market of crypto assets[’] [growth] by 79x,” promised to “provide instant liquidity” upon
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`delivery of Grams, and projected returns of “+494%” on Grams. Id. at ¶¶ 321, 328.
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`Based on all of these representations, Initial Purchasers, when evaluating whether to buy
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`Grams, placed significant weight on Messenger’s continued success, including its current and
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`expected user base and expected growth, and on Telegram’s team’s reputation. In other words,
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`reasonable Initial Purchasers were induced by Telegram to view the Offering—and did view the
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`Offering—as an investment in Telegram itself, and to view their chances of success to be
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`dependent on Telegram’s “team” to develop the future TON network, the growth of Messenger,
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`and the success of Grams as an investment. E.g., 56.1 at ¶¶ 147-48, 151, 162, 173-76.4
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`D.
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`Telegram Leads Investors To Expect Its Continued Support to the TON
`Network and the Demand for Grams after Launch.
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`The Offering Materials speak not only in terms of Telegram’s efforts to develop the TON
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`Blockchain and Messenger through the launch of the new network—but for years beyond that.
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`The Offering Materials contemplated, for example, Telegram’s creation of the “TON
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`Foundation,” to which Telegram would transfer unsold Grams to support the new network in
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`various ways. Id. at ¶¶ 123, 128. These methods included allocating: (a) 10% of all Grams (500
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`million) for “incentives for the ecosystem,” such as encouraging installation of third-party
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`validators; (b) 4% of Grams (200 million) for distribution to Durov, his brother, and the
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`development team, Stips. at ¶ 158; and (c) a minimum of 1 billion Grams to the “TON Reserve,”
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`which would in turn sell Grams at a price no less than the Reference Price and buy Grams at a
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`price no lower than half the Reference Price to ostensibly stabilize the price of Grams and “fund
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`the continued development of the TON Blockchain . . . .” 56.1 at ¶¶ 108, 110.5
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`These materials also explicitly tied the fortunes of the investors and of Telegram and its
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`developers for years to come, noting that investors would potentially hold 44% of Grams, and
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`Telegram and developers the remaining 52% and 4%, respectively. Id. at ¶¶ 66-67. Telegram’s
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`sophisticated investors understood the importance of aligning incentives through giving Grams
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`4
`For purposes of this motion, the Court may assume that Telegram indeed acted in line with the
`expectations with which it induced investors. Its expert describes Telegram as a “primary contributor to
`productivity growth” so far for the TON Blockchain, 56.1 at ¶ 358, and Telegram claims to have made
`considerable efforts since the Offering, including using approximately $390 million, without ever
`distinguishing between funds or employee efforts between Messenger and TON. Id. at ¶¶ 12-14; Stips. at
`¶ 44.
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`
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`However, Telegram’s plan to stabilize the price of Grams is inherently flawed. See 56.1 at ¶ 382.
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`to Telegram and to developers. One of Durov’s friends told him, for example, that he felt it was
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`important for the “employees and developers” to be “subject to the same lockup restrictions as
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`the investors.” Id. at ¶ 148. The friend explained that “this is what typically happens for IPOs to
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`ensure the people needed to deliver . . . have incentives to stay engaged through the lockup,” and
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`that it “would help to know to ensure your stake is as I assume it is fundamental [sic] aligned
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`with the success of TON (more is better!).” Id. Telegram went even further and assured
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`potential investors of its long-term commitment to TON by noting that the 200 million Grams
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`reserved for the development team would be subject to a four-year lockup. Id. at ¶ 388.
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`Moreover, the Offering Materials—projecting that, if Telegram spent $620 million from
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`the Offering, it could grow to one billion engaged users by 2022—emphasized a vision for the
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`continued future growth of Messenger. Id. at ¶ 122. The materials further promised that the
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`“founders of Telegram” would “be responsible” for using the funds from subsequent Grams
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`sales, that the “the initial TON vision and architecture” would be “implemented” by 2021, and
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`that thereafter the network would “be maintained” by the TON Foundation. Id. at ¶ 127.
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`Telegram Enters Into Legally Binding Gram Purchase Agreements.
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`E.
`The Gram Purchase Agreements for both rounds were nearly identical. They both
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`accepted U.S. Dollars for Grams. JX11 § 2.3, JX12 § 2.3. And they bound both Initial
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`Purchasers and Telegram to perform their obligations—respectively, to pay for the Grams by a
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`date certain and to deliver Grams upon network launch—subject only to certain conditions,
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`including investors’ completion of “know your customer” documentation and their provision of
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`certain warranties and a network address to deposit the Grams. Id. § 3. The agreements also
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`provided for automatic termination and the return of funds (minus expenses) if the new network
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`did not launch by October 31, 2019. Id. § 7.1(c). At the time of the Offering Telegram expected
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`the new TON Network to launch in the fourth quarter of 2018. See 56.1 at ¶ 41.
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`Case 1:19-cv-09439-PKC Document 79 Filed 01/15/20 Page 16 of 39
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`Based on these agreements, the parties viewed themselves as bound to perform their
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`obligations under the agreements upon execution—Telegram to deliver Grams, the Initial
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`Purchasers to pay for them—and acted in accordance with that understanding. For examp