SEC Commissioner Hester M. Peirce challenged the basis for a recent SEC enforcement action against initial coin offering (ICO) issuer Telegram Group Inc. ("Telegram") and its wholly-owned subsidiary TON Issuer Inc. (the "Defendants") for unregistered offering of digital tokens.
As previously covered, the Defendants were: (i) enjoined from further violating the registration provisions of SA Sections 5(a) and 5(c); (ii) ordered to disgorge $1,224,000,000, with credit for amounts returned to purchasers of the coins; (iii) ordered to pay a civil penalty of $18,500,000; and (iv) required to notify SEC staff before issuing any digital assets for the next three years. In its request for a preliminary injunction, the SEC argued that although the tokens ("Grams") were being sold to accredited investors in generally private transactions, the Defendants did not take any steps to prevent further redistribution in the United States. As a result, the SEC stated, the Grams did not benefit from the private placement exemption from Securities Act registration, assuming that the Grams were, in fact, "securities."
In a speech at the Blockchain Week event of the Blockchain Association Singapore, Ms. Peirce challenged the basis of the enforcement action and criticized the SEC for its failure to provide innovators with guidance as to the dividing line between tokens that are securities and those that are not.
Her first legal criticism was as to the question of whether the Grams were, in fact, securities. She argued that while they were securities when initially issued in a private placement, once they became usable on a functioning blockchain network they no longer were. Her second legal criticism went to questions of territorial jurisdiction. Ms. Peirce pointed out that Telegram was not an American company and its more significant operations were overseas. She noted that despite only approximately one-quarter of Telegram's funds being raised by U.S. investors, the injunction granted by the U.S. District Court for the Southern District of New York enjoined the company from delivering Grams to any purchaser. She cautioned that the scope of the injunctive relief might "raise some concerns among our international colleagues."
Commissioner Peirce's criticized the SEC's failure to provide any clear guidance as to how an issuer could raise money through the sale of tokens that would eventually have a use value. She argued that the appropriate course for the SEC to take was not to bring one enforcement action after another, but to issue a report on Section 21(a) of the Exchange Act that would provide technology innovators meaningful guidance.
Commentary
For those interested in the legal theory on the characterization of digital tokens as securities and on how far the Howey case may be stretched, Commissioner Peirce's statement is an important read. She questions how a digital asset may change its legal character from being a "security" (when it is purchased primarily because of its speculative value) to not being a security (when it is purchased in significant part because of its use value). As important is the fact that Ms. Peirce's chided the SEC for failing to take action and provide guidance on this legal question.
Ms. Peirce previously proposed a very detailed safe harbor as to how creators of digital assets might issue tokens without the issuance becoming subject to, and effectively prohibited by, the securities laws. See SEC Commissioner Hester Peirce Proposes Safe Harbor for Digital Tokens. While such a safe harbor would benefit from a degree of tinkering and from public comment, it could serve as an icebreaker for the SEC to engage on the legal issues. That would be better than merely bringing a series of enforcement actions that fail to provide guidance going forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
