Nature of the Case
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Facts
In 2013, the Durov brothers founded D and released Telegram Messenger, which remains D's signature product. D is a private company. Messenger is a messaging app that offers end-to-end encryption and also contains a diverse ecosystem of groups, channels, and in-app commerce. Messenger is globally popular and currently has a monthly user base of approximately 300 million. Messenger has been described as the 'cryptocurrency world's preferred messaging app.' Messenger is free and has never produced any revenue. After receiving the $1.7 billion from the private offering of 2.9 billion Grams, D used this newly raised capital to cover 'way over 90 percent' of D's expenses, which includes the costs of Messenger. D reported that, from January 2018 to January 2020, it spent $405 million, about 24% of the proceeds from the offering of Grams, on the development of the TON Blockchain and the operations of Messenger. In 2017, D began the development of a proprietary blockchain and digital asset. The Durov brothers believed that D could learn from the mistakes of existing blockchains and, by correcting their flaws, enable D's new cryptocurrency to be the first to achieve truly widespread adoption. The blockchain would be named the 'Telegram Open Network' (TON) Blockchain and its native token would be called the 'Gram.' D filed no registration statements related to any offering of the Gram Purchase Agreements or Grams. D argues that the 'offers and sales on interests in Grams' reflected in the Gram Purchase Agreements were made according to valid exemptions to the registration requirement under section 4(a)(2) and Rule 506(c). P seeks to enjoin D from engaging in a plan to distribute 'Grams,' a new cryptocurrency, in what it considers to be an unregistered offering of securities. D contends that the agreements to sell the 2.9 billion Grams are lawful private placements of securities covered by an exemption from the registration requirement and only the agreements with the individual purchasers are securities. Grams will not be delivered to these purchasers until the launch of D's new blockchain. In advance of the 2018 Sales, D circulated to all Initial Purchasers as well as other prospective purchasers a set of promotional materials, which included, among other things, primers, the Gram Purchase Agreements, the January 18, 2018 White Paper, and an explanation of certain risk factors. These materials detailed the technical specifications of the TON Blockchain and the Gram, the terms of the Gram Purchase Agreements, D's plans for distributing Grams and promoting Grams as a mass market cryptocurrency, as well as the financial opportunity presented by Grams. The promotional materials specified that 4% of Grams would be reserved for the D developers who were to build the TON Blockchain, including 1% for each Durov brother. The developers' Grams would be subject to a four-year lockup period post-launch. D retained full discretion to allocate the funds raised between the TON Blockchain, Messenger, and D generally. D reserved the right to dividend any unspent portion of the proceeds of the 2018 Sales to D's shareholders, i.e. the Durov brothers. The proceeds of the 2018 Sales stand to be a major source of the Durov brothers' profit for their years-long development of D and Messenger. D was planning to integrate the TON Blockchain with Messenger in order to 'leverage D's massive user base and developed ecosystem.' The promotional materials specified that Grams unallocated in the aforementioned plans and unsold in the 2018 Sales, an amount ultimately totaling 28% of Grams, would be allocated to a reserve pool, the TON Reserve. D stated its intention to create a non-profit foundation, the TON Foundation, to which it would transfer control of the TON Reserve as well as of governance functions for the TON Blockchain. In October 2019, D was prepared to launch the TON Blockchain and distribute Grams to the Initial Purchasers by the end of the month. If D did not deliver Grams to the Initial Purchasers by October 31, 2019, the Gram Purchase Agreements would have obligated D to refund any remaining funds from the 2018 Sales. On January 6, 2020, D posted a public statement to its website regarding the TON Blockchain, which stated that 'Telegram will have no control over TON' and that 'Grams won't help you get rich.' D claims that the anticipated resales of Grams by the 175 purchasers into a secondary public market via the TON Blockchain is a wholly-unrelated transaction and argues it would not be the offering of securities. P claims the 175 initial purchasers are, in its view, 'underwriters' who, unless D is enjoined from providing them Grams, will soon engage in a distribution of Grams in the public market, whose participants would have been deprived of the information that a registration statement would reveal.
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