Securities and Exchange Commission v. Telegram Group Inc.

Background

The provided document is a January 2, 2020 letter-motion from the Securities and Exchange Commission (SEC), not a court order. The SEC asked Judge P. Kevin Castel to compel Telegram Group Inc. and the other defendants to provide financial information and testimony in the SEC’s enforcement action.

The SEC alleged that Telegram raised approximately $1.7 billion from investors through the sale of digital tokens called Grams between approximately January and March 2018. The SEC characterized the Grams as securities and alleged that Telegram made an unregistered offering. Telegram asserted that the Purchase Agreements for Grams were securities but that their sale qualified for an exemption under Rule 506(c) of Regulation D. Telegram also argued, according to the filing, that the Grams themselves were not securities.

Discovery Requested

The SEC sought unredacted bank records showing credits and debits, including the sources and uses of investor funds. It also sought testimony from Pavel Durov, whom the defendants designated as their corporate representative under Federal Rule of Civil Procedure 30(b)(6). The requested testimony concerned Telegram’s expenditures on the Telegram Open Network blockchain and related applications, payments to non-Telegram employees, expected remaining funds, and expected future spending.

The SEC stated that Telegram had produced partial, redacted bank statements showing deposits but not expenditures. According to the SEC, Telegram later offered to provide information selected by its counsel concerning payments to third parties related to the blockchain project, rather than complete bank records. The SEC said the parties had attempted to resolve the dispute without court action but had not done so.

SEC’s Arguments About Relevance

The SEC argued that the requested information was relevant to both its claims and Telegram’s defenses. First, the SEC said the records could show whether purchasers of Purchase Agreements acted as statutory underwriters—persons involved in distributing securities—which could affect Telegram’s claimed Regulation D exemption. The SEC also pointed to documents that, in its view, suggested continuing sales after March 29, 2018, payments later in 2018, and commissions of approximately 10% to 15% connected to certain sales.

Second, the SEC argued that the records were relevant under the investment-contract test from SEC v. W.J. Howey & Co. That test asks whether people invested money in a common enterprise expecting profits from the efforts of others. The SEC said Telegram’s spending on developing the blockchain, supporting its messaging application, and building an ecosystem for the Grams could help determine whether investors expected profits from Telegram’s efforts and whether Telegram would need to continue making efforts after distribution of the Grams.

Requested Relief and Disposition

The SEC asked the court to order Telegram to produce the requested bank records and to compel its corporate representative to answer questions about the use of investor funds. The filing emphasized that Durov’s deposition was scheduled to begin in Dubai on January 7, 2020.

The provided text does not contain an order by Judge Castel granting, denying, or otherwise disposing of the motion. Therefore, the disposition of the SEC’s request cannot be determined from this document.