Telegram's grand entry into the cryptocurrency world is in limbo. After months of rumors, hype and anticipation, Telegram Open up Network's (TON) titan $1.vii billion sales round was declared illegal by the Us Securities and Substitution Commission (SEC).

Just days earlier the Oct. 16 public token distribution, the SEC dealt Telegram a crippling accident by issuing an emergency activity and restraining order. Downwards, merely non out, Telegram is now officially postponing the TON launch date. But afterward a "force majeure" clause in the purchase agreement was fabricated public, investors are concerned that Telegram could shirk its obligations to render funds from Gram token sales in the event of a delay.

Related: Telegram's TON Launch and Token Distribution — All the Details to Engagement

The road to the SEC gatekeepers is strewn with slain projects, many dreamed up by bigger and wealthier players than the Durov brothers. For a while, at least, Pavel and Nikolai seemed to take sidestepped dealing with the SEC altogether. But as ever, when dealing with the SEC, the devil is in the details.

Later on withdrawing to reassess its options, Telegram hit back with a strongly worded legal claiming to the SEC, requesting to deny the committee's injunction. The firm argued that it has voluntarily engaged with the authority for the past 18 months, simply to be slapped with the ban at the eleventh hour. The legal challenge shows Telegram isn't going anywhere without a fight.
TON launch timeline

Telegram files legal rebuttal

Telegram announced it would analyze its options in the backwash of the SEC emergency action. A few days of ominous silence followed, broken only by the forthright legal challenge from Telegram filed on Oct. sixteen. In the filing, Telegram formally requested the U.s. District Court for the Southern District of New York to deny the SEC'due south request for a preliminary injunction.

Published with just ii days to spare before the counterclaim window closes, the filing does not mince its words, stating that the "SEC's instant application is an 'emergency of its own making.'" Telegram appears to lay the blame at the feet of the SEC, challenge that information technology had gone above and beyond to assist the commission:

"Telegram produced to the SEC thousands of pages of documents and communications with U.S. purchasers; submitted five detailed legal memoranda regarding the securities question at upshot; participated in 3 in-person presentations during which it answered hundreds of questions and requested feedback; regularly engaged in email and telephone discussions regarding a wide range of topics relating to the TON Blockchain and Grams; and made modifications to the technology and operation of the TON Blockchain in response to the SEC's stated concerns."

Telegram also suggested that the SEC deliberately left their legal action until the last minute with the firm's obligation to reimburse investors in heed:

"The SEC (i) never requested that Telegram delay the launch of the TON Blockchain; (ii) never advised Telegram of its intention to seek injunctive relief; and (three) waited until the eleventh hr to file an ex parte awarding to enjoin Telegram'due south launch."

The company's complaints are not express to timing or etiquette lone. Telegram also stated that the SEC'south nomenclature of Grams as a security is incorrect and that the tokens are merely a currency or commodity such as gold or silver:

"The SEC's activeness hinges on a fundamentally flawed theory that Grams constitute a 'security' subject to the U.S. securities laws — a theory that runs counter to longstanding Supreme Court precedent, the SEC'southward own views."

While arguing that the SEC's claims are baseless, along with the commission's readiness to fight any legal challenge in court, Telegram elected to delay the launch of TON and the token distribution engagement until all legal bug are resolved. Telegram also argued in the filing that at that place is no need for the courtroom to enter a preliminary injunction.

SEC claims Telegram breached Form D restrictions

Although the public token distribution was eagerly awaited by the crypto customs in October, the event that drew the ire of the SEC is embedded in the fine impress of the company's Feb 2022 private sales round.

Related: US SEC Halts TON Launch Over $one.7B ICO — Highest-Level Action Yet?

In Feb 2022, Telegram filed what is known as a "Grade D," a type of application that relieves companies of the obligation to register their securities with the SEC. While this might audio like a staggering oversight in an otherwise robust framework of regulatory law, the Form D does non give applicants total freedom to act at will. Mark Boiron, partner at U.South. constabulary business firm FisherBroyles, explained the premise of a Grade D to Cointelegraph:

"A Form D is filed but when an offering is completed under an exemption from registration under the Securities Act of 1933, known as Regulation D." This exemption is virtually unremarkably used past crypto projects that make use of Simple Agreements for Future Tokens (SAFTs) to sell the rights to receive tokens, and in doing so, are selling a security. Boiron went on:

"As a event, the projects that utilise SAFTs need to file a Form D. If y'all search Course D on the SEC's website for the term 'unproblematic agreement for futurity tokens,' then you volition see many results popular up. The other time a Form D is filed would be when crypto itself is sold every bit a security, just that is rare."

Companies looking to stave off the all-seeing eye of the SEC need to choose from two possible exemptions, both with their own corresponding restrictions. The commencement, 506(b), bears the most constraints for prospective applicants. Under this exemption, applicants may sell the security to accredited investors, along with a maximum of 35 nonaccredited investors. The caveat: The security cannot be advertised. The SEC also gave a description of which nonaccredited investors are eligible for sales:

"Each purchaser who is non an accredited investor either alone or with his purchaser representative(s) has such knowledge and feel in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment."

Telegram chose the 2nd, a determination that would play a central role in the SEC's decision to finish TON dead in its tracks — 506(c). This exemption allows the security to avoid SEC registration if sold to accredited investors alone, while permitting the applying company to advertise.

This fateful decision is the epicentre of the SEC's restraining club. Although the initial coin offer (ICO) may well take sold to accredited investors, those very aforementioned investors could resell their newly acquired avails. For the SEC, this constituted a violation of the exemption. Consequently, the SEC declared that Telegram and TON did non register their sale of the Gram tokens, which it considers securities.

In its October. sixteen legal challenge to the SEC, Telegram sought to dispute the claims that Grams were offered through an ICO, stating that the visitor has never engaged in such an activity. The firm maintains that the tokens were sold in individual purchase agreements co-ordinate to the necessary regulatory framework:

"Unlike other digital avails that were offered to the full general public through and then-chosen Initial Coin Offerings ('ICOs'), Telegram did not — and will never — offer any securities to the public through an ICO."

In a argument to Cointelegraph, attorney for German language legal business firm Winheller, Benjamin Kirschbaum, explained that attempting to forestall regulation by the SEC is adequately common:

"It is quite common to try to foreclose regulation by the SEC and similar authorities by only targeting qualified investors. While the definition of what a 'qualified investor' is differs from jurisdiction to jurisdiction, at least in the Western Hemisphere such an offering usually does not demand to submit a prospectus."

Gary E. Murphy, counsel at New York-based legal practice Debevoise & Plimpton, told Cointelegraph that although the Class D application route is available, it is difficult to launch a cryptocurrency in a compliant way in any other class than a security, equally determined by the Howey Test:

"For the SEC to non view TON as a security, one prong of the Howey test would have needed to not exist. The most likely way to attain that in a new network is to build the network with the funds from the SAFT sale under Regulation D and publicly disclose that the issuer (in this instance Telegram) will no longer provide any development or other efforts to grow the network equally a technical affair or to bring users to the network."

Spud added that this route might non be the most appealing to Telegram from a business standpoint, as information technology would deny a swift launch of the service, "As a result, there are very few, if any, existent options to launch TON compliantly."

TON seeks delay

According to an investor bulletin shared with Cointelegraph on Oct. sixteen, Telegram announced to investors that it volition seek to delay the launch deadline to April 30, 2022. In the letter of the alphabet, published on Wed, Telegram outlined that moving the deadline will require the permission of a bulk of buy amounts received past Telegram in relation to the Phase A buy agreements. The same requirements for an extension of the presale circular as well apply.

Such an arrangement, all the same, means that one group of investors could vote to extend the deadline, while the other may non. The firm has encouraged investors to brand a decision about the extension before October. 23, ahead of the Oct. 24 court engagement with regulators in New York.

Majeure trouble alee: Legal experts speak out

As if the ban and impending courtroom date wasn't plenty drama for both investors and Telegram, some other legal technicality with the potential to take a major affect reared its head on Oct. 14. Should the filibuster to the network launch get ahead, investors that participated in the gargantuan Gram sale event may not see their spent funds in the near future.

As previously reported past Cointelegraph, Telegram'due south pledge to return coin to investors could exist superseded by a then-called "force majeure" clause in its buy agreement. Opposite to the company's claims, the force majeure clause of the contract outlined that the company is absolved of responsibility for whatever filibuster acquired past acts of God, natural disasters, war, and most importantly, governmental action or regulatory changes. Debevoise & Plimpton'south Irish potato outlined to Cointelegraph that the presence of the force majeure clause does not necessarily equate to a total loss of investment funds:

"The Force Majeure clause, on its face, does not explicitly reference the termination provision in Clause 7.1 or the obligation thereunder to pay the Termination Amount if Network Launch has not occurred equally of Oct 31, 2022. Thus investors may have a technical argument that the Force Majeure provision simply doesn't apply with respect to the obligation to either launch the TON Network by Oct 31, 2022 or pay the Termination Amount."

According to Spud, investors could debate that Telegram is more than than able to return funds from the Gram token sales rounds past virtue of the firm'due south size and acquirement, thereby cancelling out the need for the force majeure:

"They might point out that the Telegram Messenger app is functional and has a very large user base of operations, which can provide an alternative source of funds for covering the payment of the Termination Amount. Telegram besides has traditionally had access to funding from its founder."

Kirschbaum postulated that the validity of the force majeure could depend on the blazon of investor involved in the purchase of the Gram tokens:

"Since the prospectus requirements and other rules regarding securities are in identify to protect the average investor, the rules regarding qualified investors shall enable issuers to only deal with experienced clients (such every bit banks, security brokers, insurance companies, experienced wealthy individuals) where the lawmaker presumes that they can do their own due diligence before investing in whatsoever vehicle."

If Kirschbaum's hypothesis is correct, judges could side against accredited investors if the scenario, based on questioning the investor experience and assuming due diligence was conducted, does indeed occur. Regarding noninstitutional and inexperienced investors that practise not fit the SEC clarification, Kirschbaum added that the clause may not be applicable:

"Since those investors are presumably experienced, a section in the T&C similar Telegram, where a return of investment is excluded due to regulatory issues, seems valid. In such cases, experienced investors can make upward their own listen on how high the chance of regulatory action is."

Gary Tater told Cointelegraph that investors could press on Telegram for knowingly keeping them in the dark regarding the securities classifications of the token, saying: "Given that Telegram did not treat TON as securities, there could very well exist a claim investors could bring. However, without seeing all of the offer documents, it is difficult to judge."