Telegram Settlement: The Implications

By JamesIrving | Legal Mongrel | 29 Jun 2020

Photo: Still from film The Clutches of the Gang (1914)

Telegram Group settles with the SEC

Yahoo! Finance and other news outlets report that Telegram Group recently agreed to pay the SEC a penalty of USD$18.5 million: read the Yahoo! story here. Telegram Group was investigated by the SEC and taken to court for selling unregistered securities, which is a problem that a number of coin and token issuers are running into due to the fact that - depending on the situation - an ICO or STO can be held to involve an "investment contract", making it a registrable security issue in the US. The SEC is the US Government's securities regulator.

I reviewed the SEC's action against Telegram in an earlier post for Publish0x. The issue raised by this post is: will Telegram Group's settlement with the SEC encourage any civil lawsuits by investors regarding the same activity? Telegram made investment contracts with investors to raise capital to build its proposed TON blockchain. Whether any investor lawsuits eventuate may depend on the scope of the SEC settlement, and also partly on general legal principles.

Any further legal implications?

As we have seen in other examples, SEC enforcement action can help clear the road for a civil lawsuit. That is because the law normally gives persons who have been injured by a "breach of statutory duty" a right of private action. For example, in two recent lawsuits brought against the operators of in relation to its 2017 ICO, the plaintiffs have referred to enforcement action taken and penalties levied by the SEC against the defendants, with the implication that the court should follow the SEC's analysis of the alleged unlawful conduct. (See my discussion of the cases here. [As usual with any unfinished court cases, it is important to appreciate that these allegations have not yet been accepted as correct by the court.] 

As part of Telegram's settlement with the SEC, its has reportedly agreed to repay monies to its investors. The Yahoo! Finance story states that Telegram has agreed to pay USD$1.92 billion to its investors. The SEC would have taken the view that this amount of compensation allocated to the investors was fair. Telegram no doubt intends for this is the end of the story, as far as the investors go, and that no further court claims will be unnecessary. The SEC's finding that the fund allocated to compensate investors was fair (assuming it made that finding) may assist Telegram Group to reject future private claims, if any are made.

Effects on blockchain development?

The relationship between the actions of government regulators, on one hand, and the possible liability that the subjects of their law enforcement activity may face in future civil claims, on the other hand, is brought into focus by these events. Telegram alleged in its defense document that it attempted to engage with the SEC over a period of time, to avoid misunderstandings and presumably to avoid this type of enforcement action. In one of the cases, the plaintiffs in their Complaint point out that the ICO in question occurred prior to the SEC publicly issuing its Framework document, which is offered publicly as a tool to use in deciding whether a coin or token issue is a registrable security issue. Te result was, claim the plaintiffs, that the investors could not have known that the issue was a security issue. It stands to reason therefore that may not have known, either, and even that the SEC may not have been sure - depending on what stage their internal policy making was up to, at that time. 

One blockchain developer I know feels that these lawsuits and government enforcement activities are creating a very difficult environment of bureaucratic and legal compliance issues for blockchain projects. Even if a developer attempts - no doubt at some expense - to understand the laws and comply with them, that may not successfully deter subsequent law enforcement action and/or lawsuits. ICO and STO promoters worldwide must take notice of the SEC's positions on these things because the US claims extra-territorial application for its securities laws where a token or coin is marketed to a US resident. As ICOs and STOs take place online, and people can use VPNs to avoid their actual locations being known, it is technically difficult to successfully exclude US residents from buying tokens or coins online, which in turn may mean result in stricter KYC procedures, which may deter some buyers who prize their privacy, regardless of their location. 

Blockchain is a new, fast-growing technology. The pace of its progress often seems to be greater than the legal system's capacity to adapt, and to develop adequate new laws and regulatory policies, in most countries. While it is very important to block scams and control their promoters, it is also important to encourage the growth of a technology that has many great use cases and which is already bringing great benefit to us in many ways.

[Photo credit: Still from the Keystone Cops movie In the Clutches of the Gang (1914) , a public domain image by Mark Sennett Studios, courtesy of Wikimedia Commons.  This post is a basic level, educational and informational discussion of legal concepts. It does not constitute legal advice for any person, nor does it create a lawyer/client relationship with any person. Although care has been taken to ensure that the law is described correctly at the time of publication, no guarantee of accuracy is provided. The author is a lawyer involved in blockchain projects.]

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