SEC v. Telegram Group Inc., No. 1_19-cv-09439-PKC (S.D.N.Y. Mar. 24, 2020)

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The Securities and Exchange Commission (“SEC”) seeks to enjoin Telegram
Group Inc. and TON Issuer Inc. (collectivel “Telegram”) from engaging in a plan to distribute
“Grams,” a new crSWRFXUUHQF, in what it considers to be an unregistered offering of securities.
In earl Telegram received $1.7 billion from 175 sophisticated entities and high net -worth
individuals in exchange for a promise to deliver 2.9 billion Grams. Telegram contends that the
agreements to sell the 2.9 billion Grams are lawful private placement s of securities covered bDQ
exemption from the registration requirement . In Telegram’s view , onlWKHDJUHHPHQWs with the
individual purchasers are securities . Currentlt he Grams will not be delivered to these purchasers
until the launch of Telegram’s new blockchain, the Telegram Open Network (“TON”) Blockchain .
Telegram views the anticipated resales of Grams b the 175 purchasers in to a secondar public
market via the TON Blockchain as wholl-unrelated transactions and argues theZRXOGQRWEHWKH
offering of securities.
The SEC sees things differentl The 175 initial purchasers are, in its view,
“underwriters” who, unless Telegram is enjoined from providing them Grams , will soon engage
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------- --- x
SECURITIES AND EXCHANGE COMMISSION ,

Plaintiff, 19-cv-9439 (PKC)

-against - OPINION
AND ORDER
TELEGRAM GROUP INC. and TON ISSUER
INC. ,

Defendants.
------------------------------------------------------ ------x

CASTEL, U.S.D.J.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 1 of 44

2
in a distribu tion of Grams in the public market, whose participants would have been deprived of
the information that a registration statement would reveal.
C ryptocurrencies (sometimes called tokens or digital assets) are a lawful means of
storing or transferring value and maIOXFWXDWHLQYDOXHDVDQ commoditZRXOG,QWKHDEVWUDFW
an investment of mone in a cryptocurrency utilized b members of a decentralized communit
connected via b lockchain technolog which itself is administered by this communit of users
rather than b a common enterprise, is not likely to be deemed a security under the familiar test
laid out in S.E.C. v. W.J. Howe&R.
, 328 U.S. 293, 298–99 (1946). The SEC, for example, does
not contend t hat Bitcoins transferred on the Bitcoin blockchain are securities. The record
developed on the motion for a preliminarLQMXQFWLRQSUHVHQWVDYHU different picture.
The Court finds that the SEC has shown a substantial likelihood of success in
proving t hat the contracts and understandings at issue , including the sale of 2.9 billion Grams to
175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams
into a secondar public market, which would be supported b Telegra m’s ongoing e fforts.
Considering the economic realities under the Howey
test, the Court finds that, in the context of
that scheme, the resale of Grams into the secondarSXEOLFPDUNHWZRXOGEHDQLQWHJUDOSDUWRIWKH
sale of securities without a required registration statement.
Telegram knew and understood that reasonable purchasers would not be willing to
pa $1.7 billion to acquire Grams merel as a means of storing or transferring value. Instead,
Telegram developed a scheme to max imize the amount initial purchasers would be willing to pay
Telegram b creating a structure to allow these purchasers to maximize the value the receive
upon resale in the public markets.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 2 of 44

3
As part of its
Howey
analVLV the Court finds an implicit (though formally
disclaimed) intention on the part of Telegram to remain committed to the success of the TON
Blockchain post -launch. Indeed, Telegram, as a matter of fact rather than legal obligation, will be
the guiding force behind the TON Blockchain for the immediate post-launch period while the 175
purchasers unload their Grams into the secondar market. As such, the initial 175 purchasers
possess a reasonable expectation of profit based upon the efforts of Telegram because these
purchasers expect to reap w hopping gains from the resale of Grams in the immediate post -launch
period. Under the
Howey test, the series of contracts and understandings centered on Grams are a
securitZLWKLQWKHPHDQLQJRIWKH6HFXULWLHV$FWRI WKH6HFXULWLHV$FW 
For reas ons that will be more full explained, the Court finds that the SEC has
shown a substantial likelihood of success in proving that Telegram’s present plan to distribute
Grams is an offering of securities under the Howey
test to which no exemption applies. The motion
for a preliminarLQMXQFWLRQZLOOEHJUDQWHG
At the preliminarLQMXQFWLRQKHDULQJQHLWKHUVLGHRIIHUHGOLYHWHVWLPRQy, despite
an opportunit to do so. (Doc. 58). The parties presented the Court with a fulsome Joint
Stipulation of Facts (“J oint Stip.”), (Doc. 72), and each side offered deposition testimonH[KLELWV
and declarations. The parties also filed cross-motions for summarMXGJPHQW and the SEC filed a
motion to strike an affirmative defense, motions which the Court finds unnecessarWRUHDFKDWWKLV
juncture. Set forth below are the Court’s findings of fact and conclusions of law on the motion for
a preliminarLQMXQFWLRQ.
1
1 Citations to evidence are illustrative only and are not intended to indicate that the cited evidence is the only evidence
supporting the finding.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 3 of 44

4
FINDI NGS OF FACT AND CONCLUSIONS OF LAW
A. Telegram .
In 2006, Pavel Durov founded VKontakte, a Russian version of Facebook. (Joint
Stip. ¶ 9). With the help of Nikolai Durov, his brother and a skilled programmer, Pavel
successfull built VKontakte into the largest Russian social media network. (Joint Stip. ¶¶ 11–
13). Pavel accumulated a sizeable personal fortune before exiting VKontakte and leaving Russia
over disputes with the Russian government . (Plaintiff’s Exhibit (“ PX”) 18 at 2 (Doc. 122-18)) ;
(Defs .’ Resp. to Pls.’ Counter- Statement at 51 (Doc. 120)).
In 2013, the Durov brothers founded Telegram and released Telegram Messenger,
which remains Telegram’s signature product. (Joint Stip. ¶¶ 16, 23); (Defs.’ 56.1 Statement ¶¶ 42,
45 (Doc. 75)). Telegram is a private compan 3OV6WDWHPHQW¶ 154 (Doc. 80)), and Pavel
is its chief executive officer, (Joint Stip. ¶ 3) . Messenger is a messaging app that offers end- to-
end encrSWLRQDQGDOVRFRQWDLQVDGLYHUVHHFRVstem of groups, channels, and in- app commerce.
(Joint Stip. ¶¶ 18–19, 22); (Doc. 80 at 1); (PX 18 at 7) . Messenger is globall popular and
currently has a monthl user base of approximately 300 million. (Doc. 75 ¶ 43). Messenger is
also particularl popular among the crSWocurrency community and has been described as the
“crSWRFXUUHQF world’s preferred messaging app.” (Joint Stip. ¶ 23); (Joint Exhibit (“JX”) 8 at 12
(Doc. 72-8)). Telegram was founded with non- profit goals, (JX 8 at 5), and states that Messenger
will never charge user fees or introduce advertising on the app, (Joint Stip. ¶ 21). As such,
Messenger has never produced an revenues, (PX 18 at 1, 5), and, excluding the present offering
of Grams, the Durov brother s have never received an income from their wildl successful
creation . (Joint Stip. ¶¶ 14–15).
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 4 of 44

5
Messenger generates no revenues
; nearlDOORI0HVVHQJHUVH[SHQVHs prior to 2018,
including salaries and server costs, were paid for by Pavel out of his personal fortune. (Joint Stip.
¶ 17); (Doc. 80 ¶ 3). After receiv ing the $1.7 billion from the private offering of 2.9 billion Grams ,
Telegram used this newly raised capital to cover “waRYHUSHUFHQt ” of Telegram’s expenses,
which includes the costs of Messenger. (PX 12 at 53:2–3 (Doc. 122- 12)); (Doc. 80 ¶ 12); (Mallo
Decl. , Ex. 4 at 1 (Doc. 167- 4)). When describing its projected budgets for 2019 and 2020, which
totaled $180 and $220 million respectivel Telegram stated that it still lacked plans to generate
revenue from Messenger, so would continue to pay Messenger’s waXVLQJIXQGVIURPWKe offering
of Grams and Pavel’s personal wealth for the foreseeable future. (Doc. 80 ¶ 26); (PX 18 at 5, 8) .
Telegram subsequentl reported that, from JanuarWR-DQXDU 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. (Joint Stip. ¶¶ 144–45).
B. The TON Blockchain and Grams.
In 2017, Telegram began develop ment of a proprietary blockchain and digital
asset.
2 (Doc. 75 ¶ 49). The Durov brothers believed that Telegram could learn from the mistake s
of existing blockchains and, bFRUUHFWLQJWKHLUIODZV enable Telegram’s new cryptocurrency to
be the first to achieve trul widespread adoption. (Doc. 75 ¶¶ 46–48). Telegram’s proposed
blockchain would be named the “Telegram Open Network” (“TON”) Blockchain and its native
token would be called the “Gram.”
3 (Doc. 75 ¶¶ 49, 52).
2 A blockchain serves as the means of validating the authenticitRIDWUDQVIHURIDXQLWRIFUptocurrenc,WLVDZLGHO
d istributed but secure ledger or a ccount of transactions. (D oc. 75 ¶¶ 1 –3). Individual blockchain transactions are
grouped together and then recorded in “blocks” that are linked to prior blocks creating a “chain.” (Doc. 75 ¶¶ 7–8).
No centralized master copy of the blockchain exists; instead current versions of the blockchain are kept by individual
users connected across a network. (Doc. 7 5 ¶¶ 9–10); (Waxman Decl. at 1 n.1 (Doc . 16)).
3 A unit of a crSWRFXUUHQF can be used to store and transfer value, provide access to real-world services, offer voting
or governance rights within the blockchain, or power applications and smart contracts built into the blockchain.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 5 of 44

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As part of the offering materials distributed
in connection with the 2018 Sales
discussed below, Te legram released a White Paper, authored b Nikolai and dated Januar 18,
2018, that discussed the unique features of the proposed TON Blockchain. (Joint Stip. ¶ 90);
(JX 13 (Doc. 72-13) ). T he TON Blockchain would operate as a “Proof of Stake” system , which
would relRQYDOLGDWRUQRGHV FRPSXWHUVUXQQLQJIXOOYHUVLRQVRIWKH721%ORFNFKDLQVRIWZDUe )
to authenticat e new blocks and to vote on rule changes. (Joint Stip. ¶¶ 122–23, 125); (JX 13 at 10);
(McKeon Report ¶ 86, 190 (Doc. 102-1)). Validators would earn Grams for their services and
would be required to stake at least 100,000 Grams as collateral. (Joint Stip. ¶ ¶ 125, 127); (JX 13
at 44). Due to the capital and technical resources required, acting as a validator would be beRQG
the ab ility of the hSRWKHWLFDO mass market user of the TON Blockchain. (Herlih5HSRUW¶ 19);
(JX 13 at 45 (“[O]ne definitel cannot mine new TON coins on a home computer, let alone a
smartphone.”)).
According to the White Paper, at least initially, the supply of Grams would be
limited to five billion, which would be held b7HOHJUDP -RLQW6WLS¶ 138); (JX 13 at 129). Each
Gram subsequentl sold b7HOHJUDPZRXOGEHSULFHGDFFRUGLQJWRDIRUPXOD that was based on
the number of publiclRXWVWDQGLQJ*UDPVDQGSULFHGHDFK*UDPVOLJKWO higher than the last one
sold. (Joint Stip. ¶¶ 144–46); (JX 13 at 129–31) . The price produced by this formula is called the
“Reference Price.” (Joint Stip. ¶ 144); (JX 13 at 129–30) . If the market price of Grams fell below
half of the Reference Price, Telegram (or the TON Foundation, discussed below), would have
discretion to repurchase Grams and, bUHGXFLQJ the number of Grams in circulation, potentially
prevent the market price from falling further. (Joint Stip. ¶ 122); (JX 13 at 131).

( Doc . 16 ¶ ¶ 4, 5); (Doody Report ¶ 11). For instance, the native digital asset of the Bitcoin blockchain is Bitcoin and
of the Ethereum blockchain is Ether. (Doc. 75 ¶¶ 22– 23); (Dood5HSRUW¶ 10).
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 6 of 44

7

C. The 2018 Sales to Initial Purchasers .
In 2018, Telegram sold “interests in Grams” to 175 entities and high net worth
individuals (the “ Initial Purchasers”) in exchange for dollars or euros. (Joint Stip. ¶ 40); (Doc. 75
¶ 100); (JX 11 § 2.3 (Doc. 72-11)) . The agreements (the “Gram Purchase Agreements”) entitled
the Initial Purchasers to receive an allotment of Grams upon the launch of the TON Blockchain.
(Joint Stip. ¶ 140). Telegram sold to the Initial Purchasers in two rounds: the “Round One Sales”
in J anuary to February 2018 and the “Round Two Sales” in Februar to March 2018 (collectively,
the “2018 Sales”). (Joint Stip. ¶¶ 41, 46, 54).
In the Round One Sales , Telegram sold approximatel 2.25 billion Grams to 81
purchasers for $850 million , which included $385.5 million from 34 U.S. purchasers. (Joint Stip.
¶¶ 48–51); (JX 1 at 5 (Doc. 72-1)) ; (JX 9 at 17 (Doc. 72-9)) . The Grams are to be delivered when,
as , and if the TON Blockchain launches. The price per Gram was approximately $0.38. (Joint
Stip. ¶ 87). The Gram Purchase Agreements for Round One Sales included a lockup provision,
which bar s resale of Grams after their deliverWRWKe Initial P urchaser. (Joint Stip. ¶ 88). Three
months after receiving the purchased and delivered Grams, the Round One Purchaser would be
permitted to resell up to one quarter of its allotment of Grams . The remaining three quarter s of
the Gram s would be free of restrict ions in three equal tranches: 6, 12, and 18 months after the
launch of the TON Blockchain. (Joint Stip. ¶ 88). B)HEUXDU 2, 2018, the SEC had contacted
Telegram regarding the Round One Sales. (McGrath Decl., Ex. H (Doc . 83-8)); (McGrath Decl.,
Ex. K at 158:5–159:17 (Doc. 83- 11)). On Februar 13, 2018, Telegram filed a Form D for the
Round One Sales, claiming an exemption under Rule 506(c). (Joint Stip. ¶¶ 48, 52) ; (JX 1 at 6).
In the Round Two Sales, Telegram sold approximatel 700 million Grams to 94
purchasers for $850 million, which included $39 million from five U.S. purchasers. (Joint Stip.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 7 of 44

8
¶¶ 55–56); (JX 2 at 5 (Doc. 72-2)). The price per Gram was approximatel $1.33. (Joint Stip.
¶ 94). Grams purchased in the Round Two Sales did not carr a lockup provision. (Joint Stip.
¶ 93). On March 29, 2018, Telegram filed a Form D for the Round Two Sales, claiming an
exemption under Rule 506(c). (Joint Stip. ¶ 55); (JX 2 at 6). Because of the claimed exemption s,
Telegram did not register or file a registration statement for the Round One Sales or the Round
Two Sales. (Joint Stip. ¶¶ 58–59). In total, the 2018 Sales raised $1.7 billion in exchange for
approximatelELOOLRQ*UDPVZKLFKHTXDWHVWRRIDOO*UDPV (Joint Stip. ¶ 43); (Doc. 75
¶¶ 102–03); ( Doc. 80 ¶ 37).
In advance of the 2018 Sales, Telegram circulated to all Initial P urchasers as well
as other prospective purchasers a set of pro motional materials , which included, among other
things, primers, the Gram Purchase Agreements, the Januar 18, 2018 White Paper, and an
explanation of certain risk factors . (Joint Stip. ¶¶ 60–64). These materials detailed the technical
specifications of the TON Blockchain and the Gram, the terms of the Gram Purchase Agreements,
Telegram’s plans for distributin g Grams and promoting Grams as a mass market crSWocurrency,
as well as the financial opportunit presented by Grams. (Joint Stip. ¶¶ 60–104). In particular,
the promotional materials specified that 4% of Grams would be reserved for the Telegram
developers who were to build the TON Blockchain, including 1% for each Durov brother. (Joint
Stip. ¶¶ 158–59) ; (JX 9 at 16). T he developers’ Grams would be subject to a four -year lockup
period post- launch. (Joint Stip. ¶ 160); (JX 9 at 18).
The 1% of Grams given to each Durov brother is not the full extent of their ability
to profit from the 2018 Sales. Indeed, the offering materials specifically noted that Telegram
retained full discretion to allocate the funds raised between the TON Blockchain, Messenger, and
Telegram gener all -;DW–8). While a portion of the $1.7 billion has been used to develop
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 8 of 44

9
the TON Blockchain, counsel for Telegram made plain at oral argument that Telegram still
reserves the right to dividend an unspent portion of the proceeds of the 2018 Sal es to Telegram’s
shareholders , i.e. the Durov brothers . As noted, Messenger charges no user fee s and sells no
advertising and, thus, the proceeds of the 2018 Sales stand to be a major source of the Durov
brothers’ profit for their years -long development of Telegram and Messenger.
The offering materials further detailed plans to integrate the TON Blockchain with
Messenger in order to “leverag[e] Telegram ’s massive user base and developed ecosystem.” (JX 9
at 11). Specifically, Telegram stated that 10% o f Grams would be reserved for use in post-launch
incentive programs, which would encourage the widespread adoption of Grams. (Joint Stip.
¶ 163); (JX 9 at 16). Half of this pool, 5% of all Grams, will be “distributed on a first- come, first-
served basis to users of Telegram Messenger” who request Grams via a process within Messenger.
( Defs.’ Resp . Pl.’s 56.1 Statement ¶ 387 (Doc. 95)). Telegram also aimed to ensure that “[t]he
Gram will serve as the principal currency for the in -app econom on [Messenger]” and that
“Telegram ’s existing ecosVWHPZLOORIIHUVLPSOH waVRIEXing the TON coins (Grams) and a
range of services to spend them on, driving demand for the crSWRFXUUHQF.” (JX 9 at 11, 13). The
offering materials described Messenger -integrated applications to further mainstream adoption of
the TON Blockchain . In particular, Telegram pitched that “[i]ntegrated into Telegram
applications, the TON [W]allet is expected to become the world ’s most adopted crSWRFXUUHQF
wallet .”
4 (JX 9 at 11). Finallt he offering materials again emphasized that Telegram would use
anSURFHHGVUDLVHGWRIXQGERWKWKHGHYHORSPHQWRIWKH721%ORFNFKDLn as well as the ongoing
operations and expansion of Messenger. (JX 9 at 19).
4 Digital wallets, pieces of software akin to a bank account for digital assets, store “private keV, ” which grant control
over individual tokens, and permit users to easilVHQGDQGUHFHLYHWRNHQVYLDWKHEORFNFKDLQ 'RF4– 29).
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 9 of 44

10
Next, t
he 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. (Joint Stip. ¶ 162). Telegram stated it s
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 . (Joint Stip.
¶¶ 147, 151) ; (JX 15 at 8 (Doc. 72-15)) ; (JX 9 at 20) . Howeve r, Telegram noted that there was no
timetable for creating the TON F oundation and stated that it might not be created at all. (Joint
Stip. ¶ 148); (JX 15 at 8). If the TON Foundation is not formed, then the TON Reserve would
purportedly be “locked for perpetuity .” (Doc. 75 ¶ 231) . If created, the TON Foundation would
be controlled by a board on which the Durov brothers would sit ,
5 (Joint Stip. ¶ 153), and would
have discretion to buDQGVHOO*UDPVDVQHHGHGWRVXSSRUWWKHPDUNHWSULFHRI*UDPV (Joint Stip.
¶¶ 164–65). Though Telegram now disclaims the TON Foundation’s power to bu*UDPVRQWKH
open market, the offering materials highlighted this power. (Joint Stip. ¶¶ 167–68); (JX 13 at 131).
Finall t he offering materials stated that participants in the 2018 Sales would
receiv e a substantial discount on the price of Grams as compared to later sales. (JX 3 at 2
(Doc. 72-3) (describing a “private discount” of between 65.2% and 72% as compared to the price
at an eventual public sale)). Based on the number of Grams sold, the Refer ence Price of Grams at
the launch of the TON Blockchain would be approximatel -RLQW6WLS 
5 The parties agree that, in its present formulation, the TON Foundation would be overseen bDERDUGFRQVLVWLQJRI
the Durov brothers and three other “independent” members, who would have “no connection to Telegram or its
affiliates with experience in blockchain technolog and/or TON.” (Joint Stip. ¶ 154). However, Telegram has not
consistently claimed that non -Durov board positions would be held b “independent” directors. (DrOHZVNL Decl.,
Ex. 4 at 24 (Doc. 73- 4) (“[T]he TON Foundation will have the following associated members or persons: (i) Pavel
Durov; (ii) Nikolai Durov; and (iii) any other member or person selected b3DYHO'XURYDQG1LNRODL'XURYSULRUWR
the initial issuance of Grams or the incumbent members of the TON Foundation post -initial issuance.”)).
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 10 of 44

11

D. Post-2018 Sales Actions.
Following receipt of funds from the 2018 Sales, Telegram began to develop the
TON Blockchain and Grams. As discussed, Telegram also used funds from the 2018 Sales to
maintain and expand Messenger . (Joint Stip. ¶¶ 144–45). In October 2019, Telegram was
prepared to launch the TON Blockchain and distribute Grams to the Initial Purchasers bWKHHQG
of the month. (Doc. 75 ¶ 219) ; (McGrath Decl., Ex. J (Doc. 83-10)) . If Telegram did not deliver
Grams to the Initial Purchasers by October 31, 2019, the Gram Purchase Agreements w ould have
obligated Telegram to refund anUHPDLQLQJIXQGVIURPWKH6DOHV -RLQW6WLS¶ 116). After
this litigation commenced, the deadline was extended to April 30, 2020. (Joint Stip. ¶ 117). Since
then Telegram has also continued efforts to further develop the TON Blockchain. (Joint Stip.
¶ 210). On Januar7HOHJUDPSRVWHGDSXEOLFVWDWHPHQWWRLWVZHEVLWe regarding the TON
Blockchain , which stated that “Telegram will have no control over TON” and that “Gram s won’t
help RXJHWULFK 'Ulewski Decl., Ex. 3 at 1, 2 ( Doc. 73-3)).
E. Preliminar,QMXQFWLRQ6WDQGDUGLQDQ6(&$FWLRQ
Section 20(b) of the Securities Act provides that:
Whenever it shall appear to the Commission that anSHUVRQLVHQJDJHGRU
about to engage in anDFWVRUSUDFWLFHVZKLFK constitute or will constitute
a violation of the provisions of this subchapter, or of anUXOHRUUHJXODWLRQ
prescribed under authoritWKHUHRIWKH&RPPLVVLRQPD, in its discretion,
bring an action in anGLVWULFWFRXUWRIWKH8QLWHG6WDWHVWRHQMoin such
acts or practices, and upon a proper showing, a permanent or temporary
injunction or restraining order shall be granted without bond.
15 U.S.C. § 77t(b) (2018).
The required “proper showing” depends on the nature of the relief sought.
S.E.C.
v. Gonzalez de Castilla , 145 F. Supp. 2d 402, 414– 15 (S.D.N.Y. 2001). “A preliminary injunction
enjoining violations of the securities laws is appropriate if the SEC makes a substantial showing
of likelihood of success as to . . . a current violation . . . .”
S.E.C. v. Cavanagh , 155 F.3d 129, 132
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 11 of 44

12
(2d Cir. 1998) (quoting S.E.C. v. Unifund SAL
, 910 F.2d 1028, 1041 (2d Cir. 1990)). If the SEC
seeks to enjoin an ongoing violation of the securities laws, as is the case here, it must make a
proper showing of a risk of future harm, but does not need to show a risk of repetition.
United
States v. Or . St. Med. Soc ’y , 343 U.S. 326, 333 (1952) (“ The sole function of an action for
injunction is to forestall future violations. . . . All it takes to make the cause of actio n for relief b
injunction is a real threat of future violation or a contemporar violation of a nature likel to
continue or recur.”);
S.E.C. v. Commonwealth Chem. Sec., Inc. , 574 F.2d 90, 99 (2d Cir. 1978)
(“Except for the case where the SEC steps in to prevent an ongoing violation, this language seems
to require a finding of ‘likelihood’ or ‘propensitWRHQJDJHLQIXWXUHYLRODWLRQV 
see also S.E.C.
v. Gentile , 939 F.3d 549, 556 (3d Cir. 2019) (“This principle is a corollarWRWKHPRVWEDVLFUXOH
of preventive injunctive relief —that the plaintiff must show a cognizable risk of future harm.”
(citing
Or . St. Med. Soc ’y , 343 U.S. at 333)). The SEC does not need “to show risk of irreparable
injurRUWKHXQDYDLODELOLW of remedies at law” as required of private litigants. Unifund SAL , 910
F.2d at 1036. Therefore, for a preliminarLQMXQFWLRQWKH6(&PXVWPDNHDVXEVWDQWLDOVKRZLQJ
of the likelihood of success in proving a current violation of the securities law as well as a
substantial showing of a risk of future harm in the absence of such an injunction.
F. Section 5 Liability and the Howey Test .
Section 5 of the Securities Act prohibits the offer , sale, or delivery after sale of any
securitZLWKRXWa n effective or filed registration statement. 15 U.S.C. § 77e(a), (c). As such, a
prima facie case of a section 5 violation requires the SEC to show: (1) that no registration
statement was in effect or filed; (2) defendant offered or sold a securitDQG  WKHRIIHr or sale
took place in interstate commerce. S.E.C. v. Cavanagh, 1 F. Supp. 2d 337, 361 (S.D.N.Y.), aff’d
,
155 F.3d 129 (2d Cir. 1998). In this case, t he foundational question is whether Telegram’s
contract, transaction, or scheme amounts to an offer or s ale of a security.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 12 of 44

13
“Congress’ purpose in enacting the securities laws was to regulate investments, in
whatever form they are made and by whatever name they are called.” S.E.C. v. Edwards
, 540 U.S.
389, 393 (2004) (quoting Reves v. Ernst & Young , 494 U.S. 56, 61 (1990)). As such,
section 2(a)(1) of the Securities Act defines a “security” to include an “investment contract” as
well as investment vehicles such as stocks and bonds.
6 15 U.S.C. § 77b(a)(1) . Known as the
Howey
test, the Supreme Court define d an “investment contr act” as “a contract, transaction or
scheme wherebDSHUVRQLQYHVWVKLVPRQH in a common enterprise and is led to expect profits
solelIURPWKHHIIRUWVRIWKHSURPRWHURUDWKLUGSDUW.”
S.E.C. v. W.J. Howe&R. , 328 U.S. 293,
298–99 (1946).
“The enterprise and the described materials, bWKHYHU nature of the operation of
the securities laws, must be examined as of the time that the transaction took place, together with
the knowledge and the objective intentions and expectations of the parti es at that time.”
S.E.C. v.
Aqua–Sonic Prods. Corp. , 524 F. Supp. 866, 876 (S.D.N.Y. 1981) (citing United Hous. Found.,
Inc. v. Forman , 421 U.S. 837, 852–53 (1975)), aff’d, 687 F.2d 577 (2d Cir. 1982) ; see also Finkel
v. Stratton Corp. , 962 F.2d 169, 173 (2d Cir. 1992) (“[A] a sale occurs for [Securities Act] purposes
when ‘the parties obligate[ ] themselves to perform what theKDGDJUHHG to perform even if the
formal performance of their agreement is to be after a lapse of time.’” (quoting
Radiation
DQDPLFV,QFY*ROGPXQWz , 464 F.2d 876, 891 (2d Cir. 1972))).
This definition of investment contract “embodies a flexible rather than a static
principle, one that is capable of adaptation to meet the countless and variable schemes devised b
6 Section 3(a) of the Securities Exchange Act of 1934 contains a slightly different definition of “security.” 15 U.S.C.
§ 78c(a)(10). However, “[a]lthough the precise wording of the two definitional sections differs, the Supreme Court
has consistentlKHOGWKDWWKHGHILQLWLRQVDUHYLUWXDOO identical and the coverage of the two Acts may be considered
the same.” Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 756 F.2d 230, 238 (2d Cir.
1985) (citing United Hous. Found., Inc. v. Forman, 421 U.S. 837, 847 n.12 (1975)).
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 13 of 44

14
those who seek the use of the moneRIRWKHUVRQWKHSURPLVHRISURILWV Howey
, 328 U.S. at 299.
In the analVLVRISXUSRUWHGLQYHVWPHQWFRQWUDFWVIRUPVKRXOGEHGLVUHJDUGHGIRUVXEVWDQFHDQG
the emphasis should be on economic realit
Tcherepnin v. Knight , 389 U.S. 332, 336 (1967);
see also Forman , 421 U.S. at 849 (stating that “Congress intended the application of [the securities
laws] to turn on the economic realities underlLQJ a transaction, and not on the name appended
thereto”) ;
Glen-Arden Commodities, Inc. v. Costantino , 493 F.2d 1027, 1034 (2d Cir. 1974)
(asking “whether, in light of the economic realitDQGWKHWRWDOLW of circumstances,” an instrument
was an investment contract) . Disclaimers, if contrar to the apparent economic realit of a
transactio n, maEHFRQVLGHUHGE the Court but are not dispositive.
S.E.C. v. SG Ltd. , 265 F.3d
42, 54 (1st Cir. 2001).
The Howey test provides the mode of analysis for an unconventional scheme or
contract alleged to fall within the securities laws . Howey itself determined that a “scheme”
involving the sale of small tracts of land, evidenced b contracts of sale and warrant deeds,
together with service contracts for the growing of oranges on the land amounted to an “investment
contract” that was a “security .”
Howey , 328 U.S. at 299–300. Courts have found other schemes
and contracts governing a range of intangible and tangible assets to be securities . Glen-Arden
Commodities , 493 F.2d 1027 (whiskeFDVNV  Miller v. Cent. Chinchilla Grp., Inc. , 494 F.2d 414
(8th Cir. 1974) (chinchillas) ; Balestra v. ATBCOIN LLC , 380 F. Supp. 3d 340 (S.D.N.Y. 2019)
(digital tokens).
G. Exemptions from the Registration Requirement .
If the relevant instrument s are securities and a prima facie case of a section 5
violation is then established, “the burden shifts to the defendant to show that the securities were
exempt from the registration requirement.” Cavanagh, 155 F.3d at 133 (citing
S.E.C. v. Ralston
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 14 of 44

15
Purina Co.
, 346 U.S. 119, 126 (1953) ). “ Registration exemptions are construed strictlWRSURPRWH
full disclosure of information for the protection of the investing public.” S.E.C. v. Cavanagh , 445
F.3d 105, 115 (2d Cir. 2006). In this case, there are two relevant safe harbors from the registration
requirement, section 4(a) of the Securities Act and Rule 506(c) of Regulation D.
Section 4(a)( 1) exempts from the registration requirement of section 5 “ transactions
b an person other than an issuer, underwriter, or dealer ,” while section 4(a)(2) exempts
“transacti ons b an issuer not involving a public offering.” 15 U.S.C. § 77d(a) (1)–(2).
Section 2(a)(11) of t he Securities Act defines an “underwriter” as “any person who has purchased
from an issuer with a view to . . . the distribution of any securit Id.
§ 7 7b(a)(11). A
“‘distribution,’ as used in Section 2[(a)(11),] has been held to mean the equivalent of a ‘public
offering.’”
Neuwirth Inv. Fund Ltd. v. Swanton , 422 F. Supp. 1187, 1194–95 (S.D.N.Y. 1975);
see also Gilligan, Will & Co. v. S.E.C. , 267 F.2d 461, 466 (2d Cir. 1959) (stating that a
“‘distribution’ requires a ‘public offering’”); Berckele Inv. Grp., Ltd. v. Colkitt , 455 F.3d 195,
215 (3d Cir. 2006) (“[T]hose courts interpreting [section 4(a)(1)] have uniformlFRQFOXGHGWKDW
the term ‘distribution ’ is sQRQmous with ‘public offering’ as set forth under Section 4[a](2).”).
In defining “public offering,” the Supreme Court held that “it is essential to
examine the circumstances under which the distinction [between public and private] is sought to
be established and to consider the purposes sought to be achieved bVXFKGLVWLQFWLRn.”
Ralston
Purina Co. , 346 U.S. at 124 (quoting S.E.C. v. Sunbeam Gold Mines Co. , 95 F.2d 699, 701
(9th Cir. 1938)). As such, “the applicabilit of [section 4(a) (2)] should turn on whether the
particular class of persons affected need the protection of the [Securities] Act. An offering to those
who are shown to be able to fend for themselves is a transaction ‘not involving an public
offering.’”
Id. at 125. The Second Circuit has also instructed that a “‘[d]istribution’ comprises
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 15 of 44

16
‘the entire process bZKLFKLQWKHFRXUVHRIDSXEOLFRIIHULQJWKHEORFNRIVHFXULWLHVLVGLVSHUVHG
and ultimatelFRPHVWRUHVWLQWKHKDQGVRIWKHLQYHVWLQJSXEOLF R. A. Holman & Co. v. S.E.C.
,
366 F.2d 446, 449 (2d Cir. 1966) (quoting Lewisohn Copper Corp. , 38 S.E.C. 226, 234 (1958)),
aff’d on reh’g , 377 F.2d 665 (2d Cir. 1967). In claiming an exemption under section 4(a), the
defendant is required to “establish[] that [its] sales do not constitute a disguised public
distribution.”
Cavanagh , 1 F. Supp. 2d at 337.
Rule 506 of Regulation D states that “[o]ffers and sales of securities by an issuer
that satisfWKHFRQGLWLRQV>RIWKLV5XOH@VKDOOEHGHHPHGWREHWUDQVDFWLRQVQRWLQYROYLQJDQ public
offering within the meaning of section 4(a)(2) of the [Securities] Act.” 17 C.F.R. § 230.506(a).
To make use of this safe harbor, Rule 506(c) requires that the relevant securities are sold onlWR
accredited investors and that the sales also satisf5XOH G  Id.
§ 230.506( c). Rule 502(d) in
turn bars the resale of securit ies sold under a Regulation D ex emption without a registration
statement.
Id. § 230.502(d). Rule 502(d) further requires that the issuer “exercise reasonable care
to assure that the purchasers of the securities are not underwriters within the meaning of
section 2(a)(11) of the [Securities] Act .”
Id. Demonstrating reasonable care requires, among other
things, “[r]easonable inquirWRGHWHUPLQHLIWKHSXUFKDVHULVDFTXLULQJWKHVHFXULWLHVIRUKLPVHOI
or for other persons .”
Id.
A defendant, who claims protection of an exemption from registration but fails to
meet the requirements of that exemption, will be found to have violated the registration
requirements of S ecurities Act.
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17

H. The Gram Purchase Agreement s and Associated Understandings and Undertakings,
Including the Expected Resales into the S econdar0DUNHW Are Viewed as One Scheme
Under Howey .
Telegram argues that there are two distinct sets of transactions at issue in this case,
one subject to the securities laws and one that is not. In Telegram’s view, t he first set of
transaction s was the offers and sales of the “interests in Grams,” as embodied in the Gram Purchase
Agreements, to the Initial Purchasers. While Telegram concedes that the Initial Purchasers’
“interest in a Grams” are a security , it claims an exemption from registration under Regulation D.
T elegram argues that a second and distinct set of transactions will be the deliver of the newly
created Grams to the Initial Purchasers upon the launch of the TON Blockchain . Telegram stresses
that, because, upon laun ch, Grams would have “functional consumptive use s” (i.e. could be used
to store or transfer value), Grams would be a commoditDQd, therefore, not subject to the securities
laws. Specificall7HOHJUDPQRWHVWKDWXSRQUHFHLSWRIWKHLU*UDPV5RXQG7ZR3urchasers, who
are not subject to a contractual lockup period, would then be free to use Grams as a currency to
purchase goods or services on the TON Blockchain or to stake their Grams to become validators.
The economic reality of Telegram’s course of conduct is straightforward and rather
easil understood. Telegram entered into agreements and understandings with the Initial
Purchasers who provided upfront capital in exchange for the future deliverRIa discounted asset ,
Grams, which, upon receipt (an d the expiration of the lockup periods for Round One Purchasers),
would be resold in a public market with the expectation that the Initial Purchasers would earn a
profit. A reasonable Initial Purchaser understands and expects that they will onl profit if the
reputation, skill, and involvement of Telegram and its founder s remain behind the enterprise ,
including through the sale of Grams from the Initial Purchasers in to the public market.
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18
T
he Gram Purchase Agreements and the future deliver and resale of Grams are
viewed in their totality for the purpose of the Howey analysis . In Howey
, although the land
purchase contracts and the servi ce contracts were separate agreements that took effect at different
points in time and a purchaser was not mandated to enter into both, the Court analyzed the entirety
of the parties’ interaction , finding that the whole scheme comprised a single investment contract
and , therefore, a security.
Howey , 328 U.S. at 297–98 (reversing the lower court ’s decision to
“ treat[] the contracts and deeds as separate transactions”). This Court finds as a fact that the
economic reality is that the Gram Purchase Agreements and the anticipated distribution of Grams
b the Initial Purchasers to the public via the TON Blockchain are part of a single scheme.
I. The Series of Understandings , Transactions, and Under takings Between Telegram and
the Initial Purchasers Is a Security .
As discussed, “a contract, transaction or scheme” is deemed an investment contract
if it satisfies the four prongs of the Howey
test, namely (1) an investment of mone (2) in a
common enterprise (3) with the expectation of profit (4) from the essential efforts of another.
Howey , 328 U.S. at 298–99. The Court finds that the SEC has shown a substantial likelihood of
success in proving that, at the time of the offers and sales to the Initial Purchasers , a reasonable
investor expected to profit from Telegram’s continued support for Grams and the underlLQJ721
Blockchain through the distribution of Grams by the Initial Purchasers to the public. Therefore,
the series of understandings, transactions, and undertakings between Telegram and the Initial
Purchasers were investment contracts satisfLQJWKH
Howey test and , therefore, are securities.
i. The Series of Understandings , Transactions, and Under takings Should Be
Evaluated as of the Time of the 2018 Sales.
Telegram argues that Grams should be evaluated under Howey at the time of their
deliverWRWKH Initial Purchasers , i.e. at the launch of the TON Blockchain. It asserts that it will
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 18 of 44

19
not be part of a common enterprise and will not provide essential managerial efforts once the TON
Blockchain is launched . The post- launch distribution of Grams bWKH,QLWLDO3XUFKDVHUs , Telegram
argues, is independent of an Telegram action. But Howey
requires the Court to examine the
series of understandings, transactions, and undertakings at the time the were made. The Court
finds that the SEC has shown a substantial probabilit of success in proving that the series of
understandings, transactions, and undertakings are investment contracts, and therefore are
securities, under
Howey .
Under the Securities Act, “[t]he term ‘sale’ or ‘sell ’ shall include every contract of
sale or disposition of a securitRULQWHUHVWLQDVHFXULW, for value.” 15 U.S.C. § 77b(a)(3). The
Second Circuit has held that, for the purposes of the securities laws, a sale occurs when “the parties
obl igated themselves to perform what they had agreed to perform even if the formal performance
of their agreement is to be after a lapse of time.” Radiation DQDPLFs, 464 F.2d at 891; see also

Finkel , 962 F.2d at 173. “[A] contract for the issuance or transfer of a securitPD qualifDVD
sale under the securities laws even if the contract is never fully performed.” Yoder v.
Orthomolecular Nutrition Inst. , 751 F.2d 555, 559 (2d Cir. 1985); Vacold LLC v. Cerami , 545
F.3d 114, 122 (2d Cir. 2008) (stating that a sale occurs “even if the later exchange of money and
securities is contingent upon the occurrence of future events, such as the satisfaction of a financing
condition, at least when the contingency is not so unlikel that it renders the stock transacti on
extremely speculative” (citing
Yoder , 751 F.2d at 559 & n.4)); Aqua–Sonic Prods. Corp. , 524 F.
Supp. at 876 (stating that a transaction “bWKHYHU nature of the operation of the securities laws,
must be examined as of the time that the transaction took place” (citing
Forman , 421 U.S. at 852–
53)), aff’d , 687 F.2d 577. Further, there can be little argument that an offer, as a unilateral act,
occurs at the time it is made. 15 U.S.C. § 77b(a)(3) (“The term ‘offer to sell’, ‘offer for sale’, or
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 19 of 44

20
‘offer’ shall include everDWWHPSWRURIIHUWRGLVSRVHRIRUVROLFLWDWLRQRIDQRIIHUWREX, a securit
or interes t in a securitIRUYDOXH 
Based on its filed Forms D, Telegram offered and sold Grams to the Initial
Purchasers in the Round One and Round Two Sales bDWODWHVW)HEUXDU\DQG0DUFK
2018, respectivel -;1 at 6); (JX 2 at 6). Whether the scheme, viewed as a whole, amounts to
a security will be evaluated at this point in time .
ii. Investment of Mone
The first prong of Howey examines whether an investment of money was part of
the relevant transaction. In this case, the Initial Purchasers invested moneEy providing dollars
or euros in exchange for the future deliverRI*UDPV. (JX 11 § 2.3); (JX 12 § 2.3 (Doc. 72-12)).
In total, the Initial Purchasers provided Telegram with approximatelELOOLRQLQH[FKDQJHIRU
the promis ed delivery of 2.9 billion Grams upon the launch of the TON Blockchain. (Joint Stip.
¶ ¶ 43, 48, 55) ; (D oc. 75 ¶¶ 102–03). Telegram does not dispute that there was an investment of
moneE the Initial Purchasers and the Court finds that this element has been established.
iii. Common Enterprise .
The second prong of Howey , the existence of a common enterprise, may be
demonstrat ed through either horizontal commonality or vertical commonality. Horizontal
commonality is established when investors’ assets are pooled and the fortunes of each investor is
tied to the fortunes of other investors as well as to the success of the overall enterprise.
Revak v.
SEC Realt Corp. , 18 F.3d 81, 87 (2d Cir. 1994); see also SG Ltd. , 265 F.3d at 49 (des cribing
“horizontal commonality” as “a tSH of commonalit that involves the pooling of assets from
multiple investors so that all share in the profits and risks of the enterprise”);
ATBCOIN LLC , 380
F. Supp. 3d at 353. In contrast, strict vertical common alitUHTXLUHVWKDWWKHIRUWXQHVRILQYHVWRUV
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 20 of 44

21
be tied to the fortunes of t he promoter.”
7 Revak , 18 F.3d at 88 (citing Brodt v. Bache & Co., Inc. ,
595 F.2d 459, 461 (9th Cir. 1978)) ; see also In re J.P. Jeanneret Assocs., Inc. , 769 F. Supp. 2d 340,
360 (S.D.N.Y. 2011) (stating “that strict vertical commonalit (like horizontal commonalit is
sufficient to establish a common enterprise under
Howey ”).
The SEC has shown horizontal commonality. After the 2018 Sales, Telegram
pool ed the money received from the Initial Purchasers and used it to develop the TON Blockchain
as well as to maintain and expand Messenger . (Joint Stip. ¶¶ 44–45, 118). The ability of each
Initial Purchaser to profit was entirelGHSHQGHQWRQWKHVXFFHVVIXl launch of the TON Blockchain.
If the TON Blockchain’s development failed prior to launch , all Initial Purchasers would be
equall affected as all would lose the ir opportunit to profit,
8 thereb establishing horizontal
commonality at the time of 2018 Sales.
Further, horizontal commonality exists after the launch of the TON Blockchain.
T he plain economic realit is that, post -launch, the Grams themselves continue to represent the
Initial Purchasers ’ pooled funds. ATBCOIN LLC
, 380 F. Supp. 3d at 354 (finding a pooling of
assets in a post -launch digital asset ). Post- launch , the fortunes of the Initial Purchasers will also
remain tied to each other’s fortunes as well as to the fortunes of the TON Blockchain. Upon
deliverRIWKH*UDPV5RXQG7ZR3XUFKDVHUV will possess an identical instrument, the value of
which is entirely dependent on the success or failure of the TON Blockchain as well as on
Telegram’s enforcement of the lockup provisions on Round One Purchasers. All Initial
7 Strict vertical commonality is distinct from broad vertical commonality that merely requires that “the fortunes of the
investors need be linked onlWRWKHHIIRUWVRIWKHSURPRWHU Revak, 18 F.3d at 87 –88. In the Second Circuit, broad
vertical commonality does no t satisfWKHFRPPRQHQWHUSULVHSURQJRIWKH Howey test. Id. at 88.
8 While schemes with horizontal commonalitRIWHQLQFOXGHDSURUDWDGLVWULEXWLRQRIUHYHQXHVRULQFRPHVXFKDSUR
rata distribution is not a required for horizontal commonality. ATBCOIN LLC, 380 F. Supp. 3d at 354.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 21 of 44

22
Purc hasers, Round One and Round Two, were dependent upon the success of the TON Blockchain
software and, if it failed, all Initial Purchasers would suffer a diminution in the value of their
Gr ams. The investors ’ fortunes are directly tied to the success of the TON Blockchain as a whole.
9
Id.
(holding that “the value of [a post-launch digital asset] was dictated by the success of the
[blockchain] enterprise as a whole, thereb establishing horizontal commonalit  The Court
finds that the SEC has made the required showing of horizontal commonality because the record
demonstrates that there was a p ooling of assets and that the fortunes of investors were tied to the
success of the enterprise as well as to the fortunes of other investors both before and after launch.
Alternatively, the SEC has made a substantial showing of strict vertical
commonalitE ach Initial Purchaser’s anticipated profits were directlGHSHQGHQWRQ7HOHJUDPV
success in developing and launching the TON Blockchain. Telegram’s own fortunes were
similarly dependent on the successful launch of the TON Blockchain as Telegram woul d suffer
financial and reputational harm if the TON Blockchain failed prior to launch. Telegram was reliant
on funds from the 2018 Sales to meet Messenger’s $190 million and $220 million expenses for
2019 and 2020, respectivel (Doc. 80 ¶ 26); (PX 18 at 5, 8) ; (Joint Stip. ¶¶ 44–45). Failure to
launch the TON Blockchain b the contractual deadline would require Telegram to return an
unspent funds to the Initial Purchaser, depriving Telegram of its primarSODQQHGVRXUFHRIIXQGLQJ
for Messenger’s growi ng expenses. This loss of funding could potentially harm Telegram’s ability
9 T he Initial Purchasers ’ ability to time their potential sales of Grams or control other aspects of their ownership of
Grams are insufficient to negate a finding that a common enterprise exist s. Aqua –Sonic Products Corp., 687 F.2d at
578– 79 (finding a common enterprise existed though the relevant investment contract “was optional” and provided
investor s with control over aspects of the enterprise that affected their profits). The ability to sell their Grams , and
thereb exit the common enterprise , does not mean that the Initial Purchasers are not part of a common enterprise
while theFRQWLQXHGWRSRVVHVV Grams.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 22 of 44

23
to continue to expand or even maintain its signature product and, therebGDPDJHWKHIRUWXQHVRI
the compan as a whole.
The offering materials accompanLQJ the 2018 Sales further detail how Telegram’s
financial fortunes would continue to be inextricablOLQNHGWRWKHIRUWXQHVRIWKH721%ORFNFKDLQ
and, therefore those of the Initial Purchasers, after launch. After launch, Telegram’s most valuable
asset would be the TON Reserve, consisting of 28% of all Grams . Telegram states that the TON
Reserve would either be transferred to the TON Foundation, (Joint Stip. ¶ 162), or “locked for
perpetuit( Doc. 75 ¶ 231). However, Telegram is under no legal obligation to undertake either
course of action and could instead choose to retain control over the TON Reserve.
10 In that case,
the TON Reserve would be Telegram’s largest asset, thereb linking the companV financi al
fortunes to the price of Grams and the success of the TON Blockchain.
Telegram would also suffer critical reputational damage if the TON Blockchain
failed prior to or after launch. Telegram generated interest in Grams and the to -be-built TON
Blockcha in based on the reputation of Pavel and his team as the creators of Messenger, a fast
growing and well -regarded app. See, e.g.
, (PX 3 ¶ 12 (“Telegram’s founders had already created
and launched a successful messenger application, which also gave us confidence that Telegram’s
ICO would be successful, as compared to unknown teams with no experience bringing a product
to market.”)). In raising $1.7 billion, Telegram emphasized its technical expertise, promoted its
teams of “A -plaHUV (JX 4 at 4 (Doc. 72 -4)); (JX 8 at 21–24), and directl affixed its good name
to the TON Blockchain (the “
Telegram Open Network” Blockchain) and the Gram ( “Telegram ”).
10 Transferring the TON Reserve to the TON Foundation also might not restrict Telegram’s control over this pool of
Grams as Telegram is under no legal obligation to establish the TON Foundation with an actuallLQGHSHQGHQWERDUG
See supra pg. 10 n.5.
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 23 of 44

24
As such, the failure of Telegram’s new signature crSWRFXUUHQF\ project soon after launch would
tarnish the reputations of Telegram and the Durovs. The impairment of its goodwill, especially in
light of its inabilitWRJHQHUDWHUHYHQXHIURP0HVVHQJHUZRXOGVLJQLILFDQWO damage Telegram’s
abilitWRGHYHORSQHZSURGXFWVDWWUDFWQHHGHGWHFKQLFDOWDOHQW and potentially even to raise the
capital needed to sustain Messenger. C onversely, the successful launch of the TON Blockchain
would burnish Telegram’s reputation, opening new and potentiallILQDQFLDOO lucrative doors for
its next product idea. Based on the record present ed, Telegram’s fortunes are directlWLHGWRWKH
fortunes of the Initial Purchasers, which will rise and fall with the success or failure of the TON
Blockchain. As such, the Court finds that the SEC has made a substantial showing of strict v ertical
commonality .
iv. Expectation of Profit.
Howey ’s third prong examines whether the investor entered the relevant transaction
with the expectation of profit. Telegram disputes that Grams were purchased with an expectation
of profit , arguing instead that the Initial Purchasers bought Grams with the expectation to use them
as currency . The Court finds that the SEC has shown a substantial likelihood of success in proving
that the Initial Purchasers purchased Grams in the 2018 Sales with an expectation of profit in the
resale of those Grams to the public via the TON Blockchain, which would be developed b
Telegram and the success of which would be implicitlJXDUDQWHHGSRVW- launch by Telegram.
An investor possesses an expectation of profit wh en their motivation to partake in
the relevant “ contract, transaction or scheme ” was “the prospects of a return on their investment.”
Howey , 328 U.S. at 301; see also S.E.C. v. Hui Feng
, 935 F.3d 721, 730–31 (9th Cir. 2019)
(finding the requisite expectat ion of profit even when this investment intent was secondar to a
motive unrelated to profit ). Profit means an “income or return, to include, for example, dividends,
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 24 of 44

25
other periodic paPHQWVRUWKHLQFUHDVHGYDOXHRIWKHLQYHVWPHQW Edwards, 540 U.S. at 394; see

also Forman , 421 U.S. at 852 (stating that “[b] profits, the Court has meant either capital
appreciation resulting from the development of the initial investment”).
In contrast to an investment intent, an individual maDFTXLUHDQDVVHWZLWK “a desire
to use or consume the item purchased.” Id.
at 852–53. A transaction does not fall within the scope
of the securities laws when a reasonable purchaser is motivated to purchase b a consumptive
intent .
Id. The inquir is an objective one focusing on the promises and offers made to investors ;
it is not a search for the precise motivation of each individual participant. Warfield v. Alaniz , 569
F.3d 1015, 1021 (9th Cir. 2009) (“Unde r Howey , courts conduct an objective inquir into the
character of the instrument or transaction offered based on what the purchasers were ‘led to
expect.’”).
Based upon the totality of the evidence , the Court finds that, at the time of the 2018
Sales to the Initial Purchasers , a reasonable investor, situated in the position of the Initial
Purchasers, would have purchased Grams with investment intent. The Court also finds that,
without the expected abilit to resell Grams into the secondar market, the $1.7 billion paid to
Telegram would not have been raised. Several aspects of the 2018 Sales demonstrate this
reasonable expectation of profit.
The sale price of Grams during the Round One and Round Two Sales,
approximatel $0.38 and $1.33 respectively, (JX 11 at 8); (JX 12 at 2), was set at a significant
discount to the expected Reference Price post-launch and the expected market price in a post -
launch public market , (JX 13 at 129–31) . Upon the launch of the TON Blockchain, the onl Grams
available for public purchase would either be newly- released Grams from the TON Reserve or
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 25 of 44

26
Grams resold b Round Two Purchasers, whose Gram Purchase Agreements did not contain a
lockup clause . Under Telegram’s pricing formula, the Reference Price of Grams held in the TON
Reserve at launch would be approximatel -RLQW6WLS  If the market price reached
the Reference Price but no higher, it would offer Round One and Round Two Initial Purchasers an
approximate 852% and 172% premium , respectively, over their cost of acquiring Grams. This
would provide a substantial opportunit for the Initial Purchasers to profit on the resale of Gram s,
even if the market price of Grams fell below the Reference Price as the TON Reserve is not
permitted to sell newly floated Grams for less than the Reference Price. (Joint Stip. ¶ 166); (JX 13
at 131); (Dood5HSRUW (Doc. 122-10)).
Telegram also promoted the TON Foundation’s power to support the market price
of Grams. Specifically, the TON Foundation was authorized to repurchase Grams on the open
market if the ir market price fell to half (or less) of the Reference Price, which at launch would
equate to approximatelSHU*UDP -RLQW6WLS¶ 167); (JX 13 at 131); (Dood5HSRUW) .
This provision created the reasonable expectation among Initial Purchasers that , even if the market
price of Grams fell, the TON Foundation would support a market price that would enable the Initial
Purchasers to sell their Grams at a considerable profit . (Dood5HSRUW0). Further, this price
floor mechanism was pitched as a means of arresting and reversing declines in Grams’ market
price, and therebSURWHFt ing the ability of the Initial Purchase rs to profit from Gram resales, by
reducing the supplRIDYDLODEOH*UDPVDQGSUHVXPDEO increasing the price per Gram. (Joint Stip.
¶ 122); (JX 13 at 131).
The size and concentration of the ir Gram purchases indicates that the Initial
Purchasers purchased with investment , not consumptive , intent. The amount of capital raised
($1.7 billion) , the large percentage of the total supplRI Grams (58%), and the limited number of
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27
Initial Purchasers (175) support the finding that the Initial Purchasers did not intend to use their
allotments of Grams as a substitute currency to store and transfer value.
T he terms of the Gram Purchase Agreements also point to an investment intent on
the part of the Initial Purchasers . In Round One, Grams were sold at $0.38 per Gram but were
subject to a lock up agreement that prevented the Round One Purchaser s from re selling their Grams
until three months after launch. (Joint Stip. ¶ 88); (JX 11 § 10.1). After 3 months, a Round One
Purchaser was then permitted to sell up to 25% of its allotment of Grams, with additional tra nches
of Grams unlocking 6 months, 12 months, and 18 months after launch. (Joint Stip. ¶ 88); (JX 11
§ 10.1). In contrast, the Grams purchased b the Round Two Purchasers were not subject to such
a lockup agreement . (Joint Stip. ¶ 93). This differential lockup granted an exclusive window for
the Round Two Purchasers—who paid considerablPRUHSHU*UDm —to resell Grams and profit
from their investment before Grams owned b5RXQG2QH Purchasers could be sold into the market
and thereby place downward pressure on the price of Grams. (PX 30 at 11 (Doc. 122-18)) . This
exclusive window creates a structural i ncentive for the Round Two Purchasers to resell their
holdings of Grams quickl and indicates that the Round Two Purchasers bought Grams with an
investment intent.
Further, the existence of the lockups tend to negate the likelihood that a reasonable
Round One Purchaser purchased Grams for consumptive use. Simpl put, a rational economic
actor would not agree to freeze millions of dollars for up to 18 months (following a lengthy
development period) if the purchaser’s intent was to obtain a substitute for fiat currenc 'RRG
Report ¶ 5). The economic reality is that these lockups were part of the bargained -for- exchange
with Round One Purchasers, who obtained their Grams at a much lower price than the Round Two
Purchasers but with the expectation of a larger profit after the lockup period expired. The lockups
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28
supported the economic justification for Round Two Purchasers to paDKLJKHUSULFHIRU*UDPV
because the Round Two Purchasers would have an exclusive window to sell without competition
from Round One Purchasers.
The economic realities of the promised integration of Grams and the TON
Blockchain with Messenger also support a finding of a reasonable expectation on the part of the
Initial Purchasers that Grams would increase in value and return a profit. (Joint Stip. ¶ 9
(“Telegram informed the [I]nitial [P]urchasers that it hoped to integrate the TON Wallet into
Telegram Messenger in part to encourage a wide adoption of Grams after launch.”)); (JX 8 at 11–
14 (primer section entitled “Telegram Messenger -TON Integration”) ); (JX 13 at 124) . Integration
of a TON Wallet into Messenger would quickl introduce Grams to Messenger ’s 300 million
monthl user base. This anticipated integration fueled the Initial Purchasers’ expectations of a
spike in Gram demand upon launch.
11
Telegram’s offering materials targeted buHUV who possessed investment intent.
P romotional materials emphasiz ing opportunities for potential profit can demonstrate that
purcha sers possessed the required expectation of profits. See, e.g., Forman
, 421 U.S. at 853–54;
Edwards , 540 U.S. at 392. While the offering materials covered some potential consumptive uses,
(JX 8 at 14), the also highlighted the opportunit for profit b capital appreciation and resale
based on the discounted purchase price .
12 (JX 3 at 2); (JX 8 at 17). Specifically , the promotional
materials highlighted the large discount , compared to the Reference Price, (Joint Stip. ¶ 143), as
11 The 2018 Sales also provided the opportunitIRUWKH,QLWLDO3XUFKDVHUVWRWDSLQWRWKHYDOXHFUHDWHGE the growth
of Messenger. (Dood5HSRUW ¶ 28 (“This integration provides avenues for Gram holders to profit from the growth of
Telegram Messenger through their investment in Grams.”)); (PX 7 ¶ 7 (Doc. 122- 7)).
12 Information in promotional materials on consumptive uses can still create an expectation of profits if the materials
“fuel[] expectations of profit.” SG Ltd. , 265 F.3d at 54.
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29
well as to the anticipated market price, (JX 3 at 2), at which Initial Purchasers could obtain Grams.
The materials also discussed the TON Foundation’s abilitWRSURYLGHDSULFHIORRr for Grams in
the case of market turmoil. (Joint Stip. ¶¶ 164–65); (JX 13 at 131). In toto, t he offering materials
fueled the expectation that, after launch, the Initial Purchasers would be able to resell their
allotment of Grams for a profit.
C onsumptive uses for Grams were not features that could reasonablEHH[SHFWHG
to appeal to the Initial Purchasers targeted by Telegram . In seeking participants for the 2018 Sales,
Telegram did not focus on crSWocurrency enthusiasts, specialt digital assets firms, or even mass
market individuals who had a need for an alternative to fiat currenc( Doc. 80 ¶ 142); (Doc. 95
¶ 142). Instead, Telegram selected sophisticated venture capital firms (and other similar entities)
as well as high net worth individuals with an inherent preference (i.e. their business model) toward
an inve stment intent rather than a consumptive use. (Doc. 80 ¶¶ 139–42); ( Doc. 95 ¶¶ 139–42);
(PX 18 at 6).
The Court’s finding that the Initial Purchasers had a reasonable expectation of profit
is buttressed b Initial Purchasers’ subjective views, as captured in internal memoranda and emails.
T he subjective intent of the Initial P urchasers does not necessarily establish the objective intent of
a reasonable purchaser . However, the stated intent of prospective and actual purchasers , though
not considered for the truth of their content, maEHSURSHUO considered in the Court’s evaluation
of the motivations of the hSRWKHWLFDO reasonable purchaser. S.E.C. v. Texas Gulf Sulphur Co.
,
446 F.2d 1301, 1305 (2d Cir. 1971) (finding that the testimon of individual investors “was
relevant to whether [a document] was misleading to the ‘reasonable investor’”);
Slevin v. Pedersen
Assocs., Inc. , 540 F. Supp. 437, 441 (S.D.N.Y. 1982).
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30
An
actual Initial Purchaser d eclared that it “pu rchased Grams with the aim of
making a profit when it ultimatel sold the Grams” and “did not intend to use Grams for
consumptive purposes.” (PX 5 ¶¶ 21–22 (Doc. 122-5)). Another Initial Purchaser stated that they
“hoped for an increase in the value of Grams and an opportunitWRHYHQWXDOO sell Grams if the
value increased” and did “not believe that [the investor entit@LQWHQGHGWRXVH*UDPVDVFXUUHQF\
or for consumptive purposes.” (PX 6 ¶ 6 (Doc. 122-6) ). Other Initial Purchasers similarly viewed
Grams as an investment, not a consumptive asset . (PX 1 ¶ 14 (Doc. 122-1)); (PX 2 ¶¶ 14, 18
(Doc. 122-2)); (PX 3 ¶¶ 7, 18, 20 (Doc. 122-3)); (PX 4 ¶¶ 6, 13 (Doc. 122-4)); (PX 7 ¶¶ 18, 19,
21) ; (PX 8 ¶ 11 (Doc. 122-11)) ; (PX 30 at 11); (PX 31 at 4 (Doc. 122-31)) ; see also
(PX 1 ¶ 15
(stating that “[t] he pricing mechanism described b Telegram indicated that an future token
offerings would sell Grams at a higher price” )); (PX 7 ¶ 7 (stating that an investor “became
interested in investing in the Telegram ICO because [it] did not think it was possible to invest into
Telegram, the company, directly”) ). The subjective views of these Initial Purchasers , taken with
the totalit of the evidence, support the Court’s finding that the SEC has shown a substantial
likelihood of success in proving that a reasonable purchaser in the 2018 Sales had an expectation
of profit.
Telegram argues that there can be no expectation of profit in light of its disclaimers
and public statements emphasizing the consumptive use of Grams and rejecting any expectation
of profit . (DrOHZVNL'HFO([DW 7KLUGou should NOT expect anSURILWVEDVHGRQour
purchase or holding of Grams, and Telegram makes no promises that RXZLOOPDNHDQ profits.
Grams are intended to act as a medium of exchange between users in the TON ecosystem. Grams
are NOT investment products and there should be NO expectation of future profit or gain from the
pur chase, sale or holding of Grams.”) ). However, such statements , including an internet post after
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31
the initiation of this action, are insufficient to negate the substantial evidence that a reasonable
purchaser expected to profit from Grams upon their launch.
v. Efforts of Another.
The final Howey prong considers whether the expectation of profit stems from the
efforts of another. Though Howey states that th e expectation of profits should stem “solelIURP
the efforts of the promoter or a third part Howey , 328 U.S. at 299, subsequent decisions have
focused on whether the “reasonable expectation of profit s [were] derived from the entrepreneurial
or managerial efforts of others. ”
Forman, 421 U.S. at 852; see also Leonard , 529 F.3d at 88 (“ [W]e
have held that the word ‘solely ’ should not be construed as a literal limitation; rather, we ‘consider
whether, under all the circumstances, the scheme was being promoted primarilDVDQLQYHVWPHQW
or as a means whereby participants could pool their own activities, their moneDQGWKHSURPRWHr ’s
contribution in a meaningful wa.’” (quoting
S.E.C. v. Aqua –Sonic Prods. Corp. , 687 F.2d 577,
582 (2d Cir. 1982) ). The efforts of promotors, undertaken either before or after gaining control
over investor funds, are relevant considerations due to
Howey ’s focus on economic realities.
S.E.C. v. Mut. Benefits Corp. , 408 F.3d 737, 743–44 (11th Cir. 2005) ( stating that “[n] either
Howey [n]or Edwards require such a clean distinction between a promoter’s activities prior to his
having use of an investor’s moneDQGKLVDFWLYLWLHVWKHUHDIWHU” and that “investment schemes may
often involve a combination of both pre - and post -purchase managerial activities, both of which
should be taken into consideration in determining whether
Howey ’s test is satisfied ” (first citing
S.E.C. v. Eurobond Exch., Ltd., 13 F.3d 1334 (9th Cir. 1994); then citing Gary Plastic Packaging
Corp. , 756 F.2d 230; and then citing Glen -Arden Commodities , 493 F.2d 1027)).
The Court finds that the SEC has shown a substantial likelihood of success in
proving that , at the time of the 2018 Sales, a reasonable Initial Purchaser ’s expectation of profits
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32
from their purchase of Grams was based upon the essential entrepreneurial and managerial efforts
of Telegram. As Telegram has noted, Grams do not exist and did not exist at the time of the 2018
Sales . (Doc. 71 at 7, 39) . But t he Initial Purchasers provided capital to fund the TON Blockchain’s
development in exchange for the future deliverRI*UDPVZKLFKWKH expect to resell for a profit.
The offering materials recognize this economic reality and made Telegram’s commitment to
develop this project explicit. (JX 8 at 19 (stating that Telegram “intend[s] to use the proceeds
raised from the offering for the development of the TON Blockchain”)); see also
(JX 11 at 7).
Thus, to realize a return on their investment, the Initial Purchasers were entirely reliant on
Telegram’s efforts to develop, launch, and provide ongoing support for the TON Blockchain and
Grams. The Court finds that if , after immediately after launch , Telegram and its team decamped
to the British Virgin Islands, whe re Telegram is incorporated, and ceased all further efforts to
support the TON Blockchain, the TON Blockchain and Grams would exist in some form but would
likely lack the mass adoption, vibrancDQGXWLOLW that would enable the Initial Purchasers to earn
their expected huge profits.
See M. Todd Henderson & Max Raskin, A Regulatory Classification
of Digital Assets: Toward an Operational Howey Test for CrSWRFXUUHQFLHV ICOs, and Other
Digital Assets , 2 Colum. Bus. L. Rev. 443, 461 (2019) (proposing a “Bahamas Test”). Initial
Purchasers’ dependence on Telegram to develop , launch , and support the TON Blockchain is
sufficient to find that the Initial Purchasers’ expectation of profits was reliant on the essential
efforts of Telegram.
See ATBCOIN LLC , 380 F. Supp. 3d at 357.
Telegram’s advertised promotion of the TON Blockchain and Grams though
integration with Messenger created a reasonable expectation in the minds of the Initial Purchasers
that their anticipated profits were dependent on T elegram’s essential post -launch efforts. Since
announcing the TON Blockchain, Telegram’s core message has been that Gram would be the first
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33
digital asset capable of true mass market adoption. (JX 4 at 1). Telegram highlighted the value
proposition of pa rticipating in the launch of the first mainstream cryptocurrency in its offering
materials for the 2018 Sales, (JX 8 at 5 (stating that “Telegram is uniquely positioned to establish
the mass -market cryptocurrency”)); see also
(JX 9 at 5); (Joint Stip. ¶ 141), and has continue to
emphasize the potential for Gram’s mainstream adoption in its more recent public statements,
(DrOHZVNL'HFO([DW 1 (stating its intention that “Grams will become a true complement to
traditional currencies”)) . The Initial Pu rchasers recognized that an investment in Grams was a bet
that Telegram could successfully encourage the mass adoption of Grams, thereb enabling a high
potential return on the resales of Grams.
See, e.g. , ( PX 7 at 8 (investment thesis stating that Grams
“ha[ve] the potential to be the first truly mass market cryptocurrency ”)); (PX 31 at 4, 5 (investment
thesis highlighting the chance to “abilit to participate in what could be a categor defining
investment” and “[o]pportunity to invest in a token that could prevail as the leading store of value
and smart -contract platform”)).
At the time of the 2018 Sales, Telegram’s stated goal of developing Grams into the
first mass market crSWRFXUUHQF\ZDVSODXVLEOHWR7HOHJUDPWKH,QLt ial Purchasers, and the wider
market, because of Messenger and its enormous user base. If the plans for a technically identical
blockchain were floated, stripped of Telegram’s branding and support, it is unlikelWKDWVXFKDQ
offering would have raised $1.7 billion in less than three months. Telegram’s offering achieved
its success because of its stated intention to integrate the TON Blockchain with Messenger in order
to encourage the widespread use of Grams. Telegram knew that Messenger was the critical
element for the TON Blockchain to become something more than a new competitor to other
cryptocurrencies , bluntly stating that “Telegram will serve as a launch pad for TON, ensuring its
technological superioritDQGZLGHVSUHDGDGRSWLRQDWODXQFK -;DW $YDULHW of planned
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 33 of 44

34
integrations would introduce Grams to Messenger’s 300 million current monthlXVHUVDVZHOODV
to all future Messenger users, a categor which appears set to grow quickl (PX 17 at 2 (Doc.
122- 17) (Pavel writing that he “see[s] both TON and Telegram as integral parts of the success of
the project as Telegram provides the necessarXVHUEDVHDQGDGRSWLRQWRPDNHWKHZKROHLGHDRI
mass market crypto -currencZRUN 
Investors also knew that Messenger represented the key to Grams’ mass adoption
and therefore expected Telegram to use Messenger to advance this goal. See, e.g.
, (PX 32 at 1
(“TON has an effective wa to bootstrap the blockchain by leveraging Telegram’s 200M active
users.”)); (PX 2 ¶ 14 (“Telegram already had a captive communit of users, which made it less
difficult to create a new network.”)); (PX 1 ¶ 11 (“I felt that the Telegram Messenger’s user base
was a factor that was tied to how much demand there would be for Grams in the future.”)); (PX 4
¶¶ 14–15 (investor stating that it “felt that Telegram’s Messenger application would continue to
drive demand for Grams” and that “Grams would have a good sQHUJ with Telegram’s Messenger
application”)); (PX 5 ¶ 13 (“I viewed the Messenger platform and the to-be-developed TON
platform to be connected.”)); (PX 7 ¶ 19 (“Our belief was that with 180 million users, Telegram
and its applications and uses would grow in popularit and with increased use and demand the
price of Grams would rise over time.”)); (PX 33 at 2 (“The Telegram Messenger ecosystem
provides a significant go to market advantage for TON.”));
see also (PX 1 ¶¶ 11, 15); (PX 2 ¶ 7);
(PX 5 ¶ 12); (PX 30 at 5); (PX 31 at 1). The Initial Purchasers reasonably expected that Telegram
would continue to support the TON Blockchain in the post-launch period.
Telegram structured post -launch financial incentives to ensure that the link between
Grams and Messenger was unmistakable to users. As part of its promotion of the 2018 Sales,
Telegram stated it planned to reserve 1 0% of all Grams for post-launch incentive paPHQWV to
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35
encourage the growth of the TON ecosVWHP -; 8 at 18). Half of this pool, 5% of all Grams or
nearl 250 million Grams, would be offered as incentives for Messenger users to try the TON
Blockchain for the first time . (DrOHZVNL'HFO([DW3–4 (Doc. 73-5)). Grams would be freely
“distributed on a first -come, first -served basis to users of Telegram Messenger ,” who request them
via Mess enger. (Doc. 95 ¶ 387); (DrOHZVNL Decl., Ex. 5 at 3–4). These incentives, which
Telegram still plans to emplo are intended to entice Messenger users to interact with the TON
Blockchain for a monetar reward, in hopes of generating a host of first time blockchain users.
(Joint Stip. ¶ 163); (Doc. 95 ¶ 387).
T he Gram Purchase Agreements anticipate a critical role for Telegram in the post -
launch TON Blockchain. Section 5.2 of both the Round One and Round Two Purchase
Agreements oblige Telegram to “use i ts reasonable endeavours to facilitate the use of [Grams] as
the principal currenc used on Telegram Messenger b building TON Wallets into Telegram
Messenger.” (JX 11 § 5.2) ; (JX 12 § 5.2). The se still valid provisions created the reasonable
expectation in the minds of the Initial Purchasers that , following launch, Telegram would integrate
the TON Blockchain with Messenger and , thereby , continue to work to improve and advance the
TON Blockchain. Further, the Gram Purchase Agreements’ “Risk Factors” described a pertinent
potential risk to the 2018 Sales as the “[r]isks [a]ssociated [w]ith [i]ntegrating the TON Blockchain
and Telegram Messenger .” (JX 14 at 5); see also
(JX 15 at 5–6). It continued that “Telegram
intends to integrate the TON Blockchain with Telegram Messenger as described in the ‘Telegram
Messenger -TON Integration’ section of the Telegram [Round One] Primer,” before warning that,
due to anLVVXHVZLWKWKLVLQWHJUDWLRQDGRSWLRQRI*UDPVDVDIRUPRIFXUUHQF within Telegram
Messenger’s existing ecosVWHP ma be more limited than anticipated.” (JX 14 at 5);
see also
(JX 15 at 5–6). The Gram Purchase Agreements’ still enforceable terms set and continue to shape
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 35 of 44

36
the Initial Purchasers ’ expectations and would lead a reasonable purchaser to believe that Telegram
w ould work to integrate Messenger and the TON Blockchain in a manner to advance the TON
Blockchain’s success.
Indeed, as part of the 2018 Sales, Telegram explicitly promoted multiple ways in
which the TON Blockchain and Grams would be directl integrated with Messenger. In the
“ Telegram Messenger -TON Integration” section of offering materials, Telegram stated that the
official TON Wallet would be integrated into Messenger , thereb allow ing Messenger users to
control their Grams without leaving the app and permitting Grams to “serve as the principal
currency for the in -app econom on Telegram.” (JX 8 at 11, 13 (“Integrated into Telegram
applications, the TON [W]allet is expected to become the world ’s most adopted crSWRc urrency
wallet.”)); (JX 9 at 11); (Joint Stip. ¶ 140); see also
(PX 31 at 2 (investor forecast that “[a]t launch,
the Telegram TON [W]allet will become the world ’s most adopted crSWRFXUUHQF\ZDOOHt ”). Since
the institution of this action, Telegram has purported to abandon of its promise to integrate the
TON Wallet into Messenger . (DrOHZVNL'HFO([DW $WWKHWLPHRIWKHDQWLFLSDWHGODXQFK
of the TON Blockchain, Telegram’s TON Wallet application is expected to be made available
solelRQDVWDQd- alone basis and will not be integrated with the Telegram Messenger service.”)).
However, such disclaimers are not dispositive and this disclaimer in particular is equivocal on its
face. In the next bre ath, the disclaimer states that “Telegram may integrate the TON Wallet
application with the Telegram Messenger service in the future.” (
Id. ).
Telegram pledged to give Grams to its development team and the lockup provision
governing those Grams fed reasonable expectations that this development team would continue to
plaDQLPSRUWDQWUROHLQWKHJURZWKRIWKH721%ORFNFKDLQ Specifically, Telegram has reserved
4% of all Grams for the TON Blockchain development team, including 1% for each Durov brother,
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37
and has stated that these Grams w ould be distributed subject to a four -HDUORFNXSSHULRG (Joint
Stip. ¶¶ 158–60); (JX 9 at 16 , 18). A lockup period imposed on critical employees aligns their
interests with the success of Grams and the TON Blockchain during the lockup period. These
lockups have their most plausible and logical economic justification if the employees subject to
the lockup will pla a critical role in the ongoing success of the entit In fact, one investor
specificallGLVFXVVHGWKHGHYHORSHUORFNXSSHULRGZLWK Pavel and then told him that, in terms of
Pavel’s own allocation of Grams, “more is better!” because it ensured that Pavel’s interests were
“fundamental[l@DOLJQHGZLWKWKHVXFFHVVRI721” (PX 25 at 2 (Doc. 122- 25) (inquiring whether
“the tokens issued to emploHHVDQGGHYHORSHUVSUHODXQFKEHLQJVXEMHFWWRWKHVDPHORFNXSDVWKH
investors [as] [t]his is what tSLFDOO happens for IPOs to ensure the people needed to deliver the
core intellectual property have incentives to stay e ngaged through the lockup”)); (Doc. 80 ¶ 148).
The cumulative effective of the advertised integration of the TON Blockchain with
Messenger and the lockups placed on the developer’s Grams created a reasonable expectation
among the Initial Purchasers that Telegram would continue to provide essential support for the
TON Blockchain after launch. See, e.g.
, (PX 2 ¶ 14 (“Based on Telegram’s offering materials, we
also believed that the Telegram team would continue to support and grow the TON network after
launch and make it more useful, and the value of Grams would continue to go up.”)); (PX 4 ¶ 14
(“Based on the due diligence I did, I expected Telegram to continue to work on the TON
Blockchain platform it was building after launch, which would increase the value of Grams.”));
(PX 6 ¶ 3 (“[Initial Purchaser] anticipated that Telegram would remain involved in the
development of the TON network after it was launched.”)). Based on the totality of the evidence,
a reaso nable Initial Purchaser would expect Telegram to continue to support and improve the TON
Blockchain post-launch.
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38
T
he Court finds that the SEC has shown a substantial likelihood of success in
proving t hat the Initial Purchasers’ investment was made with a reasonable expectation of
Telegram’s essential entrepreneurial and managerial efforts to develop and support the TON
Blockchain and Grams.
* * *
Examining the totalitRIWKHHYLGHQFHDQGFRQVLGHULQJWKHHFRQRPLFUHDOLWLHVt he
Court finds that the SEC has shown a substantial likelihood of success in proving that the 2018
Sales were part of a larger scheme, mani fested b Telegram’s actions, conduct, statements, and
understandings, to offer Grams to the Initial Purchasers with the intent and purpose that these
Grams be distributed in a secondar public market, which is the offering of securities under
Howey
.
J. Grams Are Not Evaluated Upon the Launch of the TON Blockchain.
Telegram argues that Grams, as distinct from the Gram Purchase Agreements, must
be evaluated under Howey
when the Grams come into existence with the launch of the TON
Blockchain. Telegram then contends that, at launch, Grams would be commodities, not securities,
because Grams would be used consumptivel would not be supported b Telegram’s essential
efforts, and would lack the requisite common enterprise. Telegram emphasizes that, even if the
Court found Grams to be securities at the time of the 2018 Sal es, Grams were then covered b a
valid Rule 506( c) exemption. This exemption would extend until the launch of the TON
Blockchain, at which point Grams would be commodities not covered b the securities laws.
The Court rejects Telegram’s characterization o f the purported securitLQWKLVFDVH
While helpful as a shorthand reference, the securitLQWKLVFDVe is not simply the Gram, which is
Case 1:19-cv-09439-PKC Document 227 Filed 03/24/20 Page 38 of 44

39
little more than alphanumeric cryptographic sequence. Howey
refers to an investment contract,
i.e. a security, as “ a contract, transaction or scheme,” using the term “scheme” in a descriptive, not
pejorative , sense.
Howey , 328 U.S. at 298–99. This case presents a “scheme” to be evaluated
under Howey that consists of the full set of contracts, expectations, and underst andings centered
on the sales and distribution of the Gram. Howey requires an examination of the entiretRIWKH
parties ’ understandings and expectations. Howey , 328 U.S. at 297–98 (declining to “treat[] the
contracts and deeds as separate transactions”). Further, for the reasons discussed previouslWKH
Court finds that the appropriate point at which to evaluate this scheme to sell and distribute Grams
is at the point at which the scheme’s par ticipants had a meeting of the minds, i.e. at the time of the
2018 Sales, rather than the date of delivery.
13
K. The Grams Sales to the Initial Purchasers Do Not Fall Within an Exemption and so
Constitute a Violation of the Securities Laws .
Telegram admits it has filed no registration statements related to any offering of the
Gram Purchase Agreements or Grams. (Joint Stip. ¶ 59). Instead, Telegram 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). (Doc. 71
at 42). The Court finds that the SEC has shown a substantial likelihood of success in proving that
Telegram sold Grams to the Ini tial Purchasers with the purpose and intent that those Grams then
be distributed b the Initial Purchasers into a secondar public market . Telegram has failed to
carry its burden of demonstrating a valid exemption either under section 4(a)(2) or Rule 506( c).
The Court concludes that Telegram’s offers and sale s of the Grams represent an ongoing violation
13 Even if the Court adopted Telegram’s theorDQG evaluated Grams upon the launch of the TON Blockchain, it does
not necessarilIROORZWKDW7HOHJUDPVDQDOsis of the Howey factors at launch is correct and, thereby, that Grams are
not a securit.
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40
of section 5 and that the final step of this public distribution of a security without a registration
statement must be enjoined.
On the evidence presented, the Court finds that the scheme is “a disguised public
distribution.” Cavanagh
, 1 F. Supp. 2d at 337. Telegram’s fundamental goal was to establish
Grams as “the first mass market cryptocurrency .” (JX 4 at 1). Telegram did not intend for Gram s
to come to rest with the 175 Initial Purchasers but to reach the public at large via post- launch
resales by the Initial Purchasers. Therefore, Telegram’s sale of Grams to the Initial Purchasers,
who will function as statutor underwriters, is the first step in an ongoing public distribution of
securities and, as such, Telegram cannot receive the benefit of an exemption from the registration
requirement under either section 4(a) or Rule 506(c).
Section 4(a)(2) exempts “transactions bDQLVVXHUQRWLQYROYLQJDSXEOLFRIIHULQJ
from section 5’s registration requirement. 15 U.S.C. § 77d(a)(2). Telegram is the issuer of
Grams.
14 A sale of securities is not a public offering when it is made “to those who are shown to
be able to fend for themselves .” Ralst on Purina Co.
, 346 U.S. at 125. Telegram argues that,
because the Grams were offer ed to the Initial Purchasers, who were undoubtedl sophisticated
investors capable of fending of themselves, there was no public offering and the section 4(a)(2)
exemption applies to its sales of Grams . However, the ability of the Initial Purchasers to fend for
themselves does not end the inquiry if the Grams were not intended to come to rest with the Initial
Purchasers.
The Court finds that Telegram did not intend for the Grams to come to rest with the
Initial Purchasers . Specifically, Telegram’s goal of establishing Grams as “the first mass market
14 “The term ‘issuer’ means everSHUVRQZKRLVVXHVRUSURSRVHVWRLVVXHDQ securit86&E D  .
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41
cryptocurrency” required that the 58% of all Grams sold in the 2018 Sales reach a much wider
pool than the 175 Initial Purchasers. As discussed previousl7HOHJUDPEXLOWHFRQRPLFLQFHQWLYHV
into the 2018 Sales, including large discounts and differential lockups, to ensure that the Initial
Purchasers resold Grams soon after launch. Further, Telegram sought out participants for the 2018
Sales, such as major venture capital firms, that would purchase with an investment intent and so
would sell their allocation of Grams quicklWRHDUQDSURILW
The Second Circuit has held that securities do not come to rest with investors who
intend a further distribution. Gilligan, Will & Co.
, 267 F.2d at 468 (stating that a security d oes not
come to rest with an investor who purchased “speculativel and with “a view to distribution”) ;
see also Geiger v. S. E.C. , 363 F.3d 481, 487–88 (D.C. Cir. 2004) (stating that one “did not have
to be involved in the final step of [a] distribution to have participated in it” and that the purchase
of shares at “a substantial discount” followed by their quick resale supported a finding that the
shares were not at rest). The Court finds that Telegram intended that Grams be distributed to the
public through the Initial Purchasers. The Court further finds that the public “need[s] the
protection of the [Securities] Act.”
Ralst on Purina Co. , 346 U.S. at 125. The Court concludes that
Telegram’s offer and sale of Grams to the Initial Purchasers is a public offering and ineligible for
a section 4(a)(2) exemption to the registration requirement.
Rule 506(c) exempts transactions that meet its conditions from section 5’s
registration requirement. 17 C.F.R. § 230.506(c). One requirement of Rule 506(c) exemption is
that the issuer “ exercise reasonable care to assure that the purchasers of the securities are not
underwriters within the meaning of section 2(a)(11) of the [Securities] Act ,” w hich in turns
requires a“[r] easonable inquirWRGHWHUPLQH if the purchaser is acquiring the securities for himself
or for other persons .” Id.
§ 230.502(d). The Court finds that Telegram failed to use reasonable
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42
care to ensure that the Initial Purchasers were not underwriters, and therefore may not avail itself
of a Rule 506(c) exemption.
Section 2(a)(11) defines an “underwriter” as “any person who has purchased from
an issuer with a view to . . . the distribution of anVHFXULW.” 15 U.S.C. § 77b(a)(11) . And, again,
a distribution includes “the entire process bZKLFKLQWKHFRXUVHRIDSXEOLFRIIHULQJWKHEORFNRI
securities is dispersed and ultimatelFRPHVWRUHVWLQWKHKDQGVRIWKHLQYHVWLQJSXEOLF
R. A.
Holman & Co. , 366 F.2d at 449. Th e Initial Purchasers bought Grams from Telegram , the issuer,
with an intent to resell them for profit in the secondar market soon after launch of the TON
Blockchain . The Grams would not and were not intended to come to rest with the Initial Purchasers
but instead were intended to move from the Initial Purchasers to the general public . Therefore,
this two -step process represents a public distribution and the Initial Purchasers , who acted as mere
conduits to the general public , are underwriters.
Telegram argues that, even if Initial Purchasers are statutory underwriter s, it
complied with Rule 502(d) b taking reasonable care to ensure that the Initial Purchasers were
purchasing for themselves and not to resell to their Grams to others. Specifi cally, Telegram points
to a representation and warranty in each Gram Purchase Agreement that required the Initial
Purchasers to warrant that theZHUHSXUFKDVLQJWKH7RNHQVIRU>WKHLU@RZQDFFRXQWDQGQRWZLWK
a view towards, or for resale in connection with, the sale or distribution.” (Doc. 75 ¶ 209); (JX 11
at 20). However, in evaluating economic realit of this scheme , legal disclaimers do not control .
The representation and warranty that the Initial Purchasers purchas ed with out a view towards
resale rings hollow in the face of the economic realit ies of the 2018 Sales. From Telegram’s
perspective, it was critical that the Initial Purchasers could flip their Grams in a post-launch
secondar market because this feature would increase the amount of mone it could raise. Based
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43
on these economic realit ies, Telegram’s contrarUHSUHVHQWDWLRQVZLOOQRWEHDFFRUGHGFRQWUROOLQJ
weight. Telegram did not take reasonable care to ensure that statutory underwriters were not
participants in the 2018 Sales. As the 2018 Sales to the Initial Purchasers were merely a step in a
public distribution of Grams and Telegram was aware that Initial Purchasers were statutory
underwriters, Telegram’s sales of Grams do not qualif for a Rule 506(c) exemption from the
registration requirement.
The Court finds that the SEC has shown a substantial likelihood of success in
proving that the Gram Purchase Agreements, Telegram’s implied undertakings, and its
understandings with the Initial Purchasers, including the intended and expected resale of Grams
into a public market, amount to the distribution of securities, therebUHTXLULQJFRPSOLDQFHZLWK
section 5 . Telegram has failed to establish an exemption to the registration requirement under
either section 4(a)(2) or Rule 506(c). Further, the Court concludes that the SEC has shown that
the sale an d imminent delivery of Grams represent a single ongoing violation of section 5. The
Court also finds that the delivery of Grams to the Initial Purchasers, who would resell them into
the public market, represents a near certain risk of a future harm, namel WKHFRPSOHWLRQRIDSXEOLF
distribution of a security without a registration statement. An injunction, prohibiting the deliver
of Grams to the Initial Purchasers and therebSUHYHQWLQJWKHFXOPLQDWLRQRIWKLVRQJRLQJYLRODWLRn,
is appropriate and will be granted.
CONCLUSION
Plaintiff’s motion for a preliminary injunction , (Doc. 3), is GRANTED.


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SO ORDERED.

________________________________
P. Kevin Castel
United States District Judge
Dated: New York, New York
March 24, 2020
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