b'SEC SETTLEMENTS AND ENFORCEMENT ACTIONS GOODWINRegulation D, conducted extensive diligence to ensure The SEC argued that Kiks offer and sale of Kinpurchasers were accredited and not purchasing as was an offer and sale of investment contractsunderwriters, provided the requisite disclaimers set under the test set forth in SEC v. W.J. Howey Co.forth in Regulation D, and filed a Form D with the SEC memorializing the exemption.because, when investors bought Kin in 2017 usingThe motions for summary judgment are currentlyU.S. dollars or digital assets convertible to U.S.under submission.dollars, they were investing in a common venture and reasonably expected profits derived fromU.S. Securities and Exchange Commission v. the entrepreneurial or managerial efforts of Kik.Telegram Group Inc., No. 19 Civ. 9439, 2020 WL 1430035 & 2020 WL 1547383 (S.D.N.Y. Mar. 24, 2020 & Apr. 1, 2020)even if the portion of Kiks offering sold through thoseOn March 24, 2020, the U.S. District Court for the contracts was a separate offering, it still was notSouthern District of New York granted the SECs motion exempt under Rule 506(c) because Kik did not takefor a preliminary injunction preventing the Telegram any steps to restrict the purchasers from immediatelyGroup Inc. (Telegram) from distributing more than reselling Kin to the public but instead structured theUS $1.7 billion worth of tokens called Grams to ICO for those purchasers to resell Kin to the public. purchasers. The SEC previously filed an emergency Kik moved for summary judgment on two primaryaction for violations of Sections 5(a) and 5(c) of the grounds of its own. First, Kik argued that the portion ofSecurities Act for the sale of unregistered securities on the ICO directed to the public (approximately half of theOctober 11, 2019, and obtained a temporary restraining US $100 million in proceeds) did not give rise to anyorder preventing Telegram from distributing Grams. investment contracts under the test set forth inSECIn addition to a preliminary injunction barring the v. W.J. Howey Co. because there was no commondistribution of Grams, the SEC seeks disgorgement enterprise and no expectation of profits based on theof ill-gotten gains with prejudgment interest, an order essential managerial efforts of others. Specifically,prohibiting defendants from participating in any offering there was no common enterprise between or amongof digital asset securities, and a monetary penalty.Kik and those who purchased Kin because the termsTelegram is a company that owns and operates the of sale obligated Kik only to deliver Kin, purchasersmobile messaging application, Telegram Messenger. agreed to purchase Kin without any other ongoingBetween January and March 2018, Telegram allegedly contractual obligations for Kik, and Kik had no controlconducted an ICO for Grams to raise capital and over Kin or their use by purchasers after delivery. Therefinance its blockchain, the Telegram Open Network or was no reasonable expectation of profits based onTON Blockchain. Telegram allegedly sold 2.9 billion the essential managerial efforts of others because KikGrams at discounted prices to 171 initial purchasers promoted Kin as a medium of exchange to be used inworldwide, including more than 1 billion Grams to 39 a new digital economy rather than as an investmentU.S. purchasers, and allegedly raised approximately US opportunity, made clear that the economys success$1.7 billion. Telegram allegedly promised to deliver the was dependent on developers and consumers otherGrams to the initial purchasers upon the launch of the than Kik transacting in Kin, and emphasized that itblockchain by no later than October 31, 2019, and also could not guarantee the price of Kin or its liquidity onallegedly planned on selling millions of additional Grams secondary market exchanges. at that time. Purchasers and Telegram then allegedly Second, Kik argued that the portion of the ICOwould be able to sell the Grams in the United States.directed toward wealthy purchasers was exemptApplying the test set forth in SEC v. W.J. Howey Co., from registration under SEC Rule 506(c). In particular,the court found that the SEC had shown a substantial Kik sold Kin to accredited investors as defined inlikelihood of success in proving that Grams were 13'