Securities and Exchange Commission v. Telegram Group Inc.

Background

On March 24, 2020, the court granted the Securities and Exchange Commission’s request for a preliminary injunction. A preliminary injunction is a temporary court order intended to prevent specified conduct while litigation continues. The injunction used the language proposed by the SEC, including a prohibition on delivering Grams to any person or entity or taking other steps to carry out an unregistered offer or sale of Grams.

Telegram filed a notice of appeal the same day. It then asked the district court to clarify whether the injunction applied only to purchase agreements with U.S.-based investors. The court noted that Federal Rule of Civil Procedure 62(d) gives a district court limited authority to clarify an injunction during an appeal, generally allowing only relief needed to preserve the existing situation. The court stated that, if it lacked authority to decide the issue definitively, its ruling should be treated as an indicative ruling.

Telegram’s Argument

Telegram argued that the injunction should not reach initial purchasers who were not U.S. persons. It relied on Morrison v. National Australia Bank Ltd. and argued that the purchase agreements with non-U.S. parties were entered into outside the United States, included foreign choice-of-law provisions, and involved non-U.S. defendants and, in Telegram’s view, mostly non-U.S. initial purchasers.

Telegram also proposed safeguards intended to prevent non-U.S. private-placement purchasers from reselling Grams to U.S. purchasers. The proposals included contractual resale restrictions and configuring the TON digital wallet to block U.S.-based addresses.

Court’s Analysis

The court explained that, for securities transactions not involving a domestic exchange, a transaction is domestic if irrevocable liability is incurred or title passes in the United States. It concluded that Telegram’s focus on individual initial purchasers and their purchase agreements missed the court’s central reasoning in granting the injunction. The court had treated the security as the entire scheme involving the purchase agreements, Telegram’s related understandings and undertakings, and the expectation that initial purchasers would distribute Grams into a secondary public market.

At the preliminary-injunction stage, the court concluded that the intended resale of Grams through Telegram’s conduits would likely involve U.S. purchasers and would likely satisfy the transaction-based test discussed in Morrison.

The court identified several problems with Telegram’s proposed safeguards. Telegram did not explain how new restrictions could lawfully modify purchase agreements entered in 2018. The court also stated that the TON Blockchain was designed and intended to provide anonymity, making resale restrictions of doubtful practical enforceability. It further found that Telegram had not shown how withholding the TON Wallet from self-reported U.S. users would be effective or enforceable, particularly because users could disclaim having a U.S.-based address and third-party wallets might not block U.S.-based addresses. The court also noted that Telegram raised these proposals after the period for discovery before the injunction had closed, leaving the SEC without an opportunity to challenge their effectiveness through expert testimony or other evidence.

Ruling

The court emphasized that Telegram had known the proposed injunction’s language since October 11, 2019. In opposing the SEC’s preliminary-injunction motion, Telegram had a full and fair opportunity to argue that the requested relief was overbroad, unworkable, or impermissibly applied outside the United States. The court noted that Telegram had not objected to the injunction’s form or cited Morrison in that opposition.

The court denied Telegram’s application. It also stated that Telegram had not waived its defense concerning the possible extraterritorial application of U.S. securities laws as to the ultimate merits of the case, because that defense appeared in Telegram’s answer. The court’s ruling addressed Telegram’s request to clarify the preliminary injunction, not the final merits of that defense.