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Reading Between the Lines: SEC, Telegram, and Rule 144 (a16z.com)
44 points by todsacerdoti 34 days ago | hide | past | web | favorite | 17 comments



Note that a16z is an RIA now - not a VC anymore. Recent news stories tell of them planning on investing up to $1B in crypto. As an RIA, they can make riskier investments.

Here is the governments claim (3):

"Grams are securities because the Initial Purchasers and subsequent investors expect to profit from Telegram’s work: the development of a TON “ecosystem,” integration with Messenger, and implementation of the new TON Blockchain."

TON failed the Howey test by their offering in the US markets and - this is the critical part not mentioned - they refused to acknowledge or respond to the SEC. Full-stop, end of story. The courts can start to wrap it up on April 30.


> As an RIA, they can make riskier investments

Less liquid. Not necessarily riskier. RIAs also have more reporting requirements and liabilities to their investors than private funds like VCs.

> they refused to acknowledge or respond to the SEC

Can’t imagine this thrilled their investors.


> Because if the SEC’s interpretation stands, any purchaser of a security issued by a non-public company could be deemed to be an underwriter.

As very non-knowledgeable person in this are I believe this is where the argument falls apart.

The interpretations is specific to Gram tokens, not "a [arbitrary] security issued by a non-public company".

I.e. it's about the "innate" nature of this specific security (Gram token), which is different to e.g. the security normally involved in VC.

_At least if it's not VC business mean to "scam" later investors, in which case it very well could apply._ (And probably should?)


I'm also not knowledgeable in this area, but I agree with you. Would love to see an unbiased legal expert's opinion. Definitely feels like a stretch to me though, as you've pointed out.


It must be extremely frustrating for the VC firms to be cut out of the "next Whatsapp" entirely. In the unlikely event that Telegram prevails, it's not entirely clear why venture investment would even be needed in a lot of cases. The "network" would still be valuable, but I think it can be purchased for a lot less.

I'd much prefer a 100% transparent, cryptographically verifiable ownership contract to an impenetrable maze of the usual one sided legalese you will find in equity contracts.

I'm not a VC, though. I'm sure VCs would much prefer the opposite: for things to remain just as they are now. Regulatory capture is a powerful thing.


Weren't most of the buyers of the TON/Gram pre-ICO VCs? They're not cut out at all.

More generally, there's no reason why entrepreneurs would refuse investment from good VCs. I can imagine scammers would want to lock out VCs to avoid scrutiny, but real businesses shouldn't.


VCs don't just buy small chunks of companies. They normally also buy influence and (often) preferential treatment, which they don't get if they just buy into an ICO.


Not entirely sure why the SEC even has jurisdiction here ... isn't Telegram based outside of the US?

And even if they decide they do have jurisdiction, how are they going to enforce anything?


It would affect US buyers or more concrete re-sellers of Gram tokens. Given that you normally buy this kind of tokens to either trade them or keep them as a security you sell when you need money it matters a lot.


Wouldn't it only prevent formal legal entities (ie US companies) from making purchases? End users could trivially purchase via non-US payment services, and I don't see how the US could actually prevent "import" or use of crypto tokens in practice.

To me, it seems similar to the way the GDPR claims to apply to entities which don't operate in the EU - good luck enforcing that in practice!


> how are they going to enforce anything?

Fines and C&Ds. If those court orders are wilfully ignored, it turns into a more serious law enforcement issue. In the meantime, they get locked out of the U.S. dollar capital markets.


Telegram Messenger LLP is (was?) UK based, but it looks like it's being gotten rid of. [1]

From the same article:

> Telegram Messenger LLP was established in February 2014 by two companies – Dogged Labs Ltd. (British Virgin Islands) and Telegraph Inc. (Belize). In May 2018, however, Dogged Labs was substituted for Telegram Messenger Inc., which is also registered in the British Virgin Islands.

How the SEC (or the US in general) intends to undertake effective enforcement action against a cryptocurrency provider operating out of either of those jurisdictions is beyond me. They don't exactly have a physical product whose import you can ban...

[1] https://news.bitcoin.com/pavel-durov-closes-uk-based-company...


> How the SEC (or the US in general) intends to undertake effective enforcement action against a cryptocurrency provider operating out of either of those jurisdictions

If you sell securities to American investors, you’re subject to U.S. securities law. This is true for practically every financial market.

As for exerting influence, I can’t think of many easier foreign jurisdictions for U.S. law enforcement to get its way in than BVI, particularly post-Brexit.


I'd quibble that it's your customers that fall under American jurisdiction, and that in order to retain them you voluntarily choose to adhere to the applicable regulations. Naturally US companies wouldn't be legally permitted to purchase their tokens, but other than using that as a form of coercion I don't see how enforcement could be achieved.

Regarding BVI, I'm admittedly not familiar with them or their legal system. Do they have financial enforcement agreements (or some other arrangement) in place with the US?


> you voluntarily choose to adhere to the applicable regulations

This is a fine philosophical argument. But practically, it isn’t how any financial laws work.

(To illustrate why, imagine an American fraudster selling Ponzi schemes to Germans. Would it make any sense to say the fraudster is beyond German law? Of course not.)

> Do they have financial enforcement agreements (or some other arrangement) in place with the US?

BVI is a British Overseas Territory. It’s a common Europe-U.S. linkage.

If they ignore U.S. court orders, everything from asset freezing and seizure to extradition is on the table.


> Would it make any sense to say the fraudster is beyond German law? Of course not

But this is only the case because the US has agreements in place with Germany (and the EU more generally I think?). Were the fraudster located in a less "friendly" territory, they might indeed be beyond reach. For example, I don't generally expect Russia to be cooperative in extraditing anyone to the US anytime soon.

As to British Overseas Territories, the Wikipedia page wasn't particularly enlightening as to what legal arrangements might currently be in place. I'll take your word that a relevant framework exists. As such, I do wonder how Telegram is planning to navigate this.


> this is only the case because the US has agreements in place with Germany

The agreements don’t make the law, they facilitate enforcement. If you sell Ponzi schemes to Germany from Russia, you’ve still broken German law. It will just be difficult to enforce.

The U.S. has extensive law-enforcement coöperation agreements with the U.K. BOTs are “under the jurisdiction and sovereignty of the United Kingdom... with the UK retaining responsibility for defence and foreign relations“ [1].

[1] https://en.m.wikipedia.org/wiki/British_Overseas_Territories




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