The case against integrating the two prongs of a SAFT

The sale of the contractual rights is acknowledged to involve a security and is structured to comply with one of the available exemptions from registration contained in U.S. law.

Although the SAFE process is widely accepted, the U.S. Securities and Exchange Commission objected to Telegram's sale of contractual rights, filing to enjoin the issuance of Grams in October of 2019.

In a serious oversimplification that will probably have securities lawyers cringing, all sales that are part of a single offering have to comply with the requirements of that offering.

If there are enough differences between the two sales, they are not supposed to be integrated or treated as part of the same offering.

Telegram raised the funds it needed to develop the Grams and work on the Telegram Open Network with the original sale of contractual rights.

The sale of contractual rights took place more than a year before the crypto assets were to be available, and more than two years before the court issued its preliminary injunction.

While all sales are likely to involve payment of assets convertible into fiat currency, any earnings from the resale of Grams would benefit the original purchasers, not Telegram, and thus would not be for the same general purpose.

In March 2020, the SEC proposed rules that would make it substantially less likely for integration to occur, including a safe harbor if sales occur more than 30 days before or 30 days after an offering.

Judge Castel's approach in SEC v. Telegram appears to ignore all of this and, instead, treats sales of a different kind of interest occurring more than a year apart, for different purposes, as part of a single scheme because the resales are "Foreseeable." That is a ruling that, if followed and applied elsewhere, will only increase the burdens on innovative, startup businesses; push more companies overseas to avoid our overly restrictive and unpredictable requirements; limit U.S.' investors' ability to participate in new business; and further muddle an already confusing area of the law.

This is part two of a three-part series on the legal case between the U.S. SEC and Telegram's claims to be securities - read part one on introduction to the context here, and part three on the decision to apply U.S. requirements extraterritorially here.