MSTR Cat

Crypto Law/Level III · Tokens and securities law/3.1 The Howey test/Lesson 6

Telegram, Kik and LBRY

Three SEC token cases that courts decided against the issuers, each with a different sales structure, and where those tokens stand under the SEC’s 2026 approach.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Keep early private sales from becoming a public distribution: Telegram’s 2020 injunction rested on initial purchasers acting as conduits to the public. Use real resale limits, such as the Rule 144 holding period of six months or one year, enforced in the token contract itself.
  2. Do not run a presale and a public sale as one plan; in Kik (S.D.N.Y. 2020) the court integrated both into a single unregistered offering. Separate offerings need genuinely independent terms, timing and buyers, or the cheapest exemption is lost for the whole raise.
  3. Continuous treasury sales count too: LBRY held no ICO yet lost in 2022 because holding an ICO is not decisive. Selling a token now classed as a digital commodity (SEC Release 33-11412) is safer only if no promises of managerial effort accompany the sales.
  4. If an unregistered offering has already happened, early counsel and voluntary remediation usually cost far less than litigation; LBRY’s penalty was cut to $111,614 for limited funds, yet the permanent injunction stayed. Paying a lawyer here is cheaper overall given the stakes.

MaterialsSEC press releases 2019-212 and 2020-146 (Telegram) and 2019-87 and 2020-262 (Kik)SEC Litigation Release No. 25060 and the July 11, 2023 remedies order in SEC v. LBRY, Inc. (D.N.H.)The token-distribution section of any project’s whitepaper, to compare with these three structures

Wonder

  1. Can selling only to wealthy, sophisticated buyers avoid the securities laws?
  2. Does it matter that a token was never sold in a formal ICO?
  3. If a court once called the sales securities offerings, is the token a security forever?

Explore

  1. These three cases share a pattern. Each issuer sold its own token to raise money for a network it was building, did not register the sales with the SEC, and argued the token was a currency or a product for use rather than an investment. In each, a federal court applied Howey (lesson 3.1.1) and ruled for the SEC. They differ in how the tokens were sold: private sales to large buyers with a planned public launch, a presale combined with a public sale, and continuous sales over years without any initial coin offering (ICO).
  2. Telegram began raising money in January 2018 to build the TON Blockchain. It sold about 2.9 billion ‘Grams’ at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 US purchasers, raising more than $1.7 billion, and promised delivery at the network’s launch, no later than October 31, 2019. On October 11, 2019 the SEC filed an emergency action in the Southern District of New York. The SEC said that once Grams were delivered, the purchasers and Telegram would be able to sell billions of them into US markets.
  3. On March 24, 2020 the court issued a preliminary injunction barring delivery of the Grams, finding the SEC likely to prove that the sales were part of a larger scheme to distribute Grams into the public secondary market. The court treated the ‘scheme’ as ‘the full set of contracts, expectations, and understandings centered on the sales and distribution of the Gram’, not just the paper contracts. In a settlement approved on June 26, 2020, Telegram agreed to return more than $1.2 billion to investors, pay an $18.5 million civil penalty, and notify the SEC for three years before taking part in any digital-asset issuance.
  4. Kik, whose messaging app had lost money for years according to the SEC, sold one trillion ‘Kin’ tokens in 2017 in what the SEC called a $100 million offering, combining a discounted presale to wealthy buyers with a public sale and raising more than $55 million from US investors. The SEC alleged Kik promised to build demand for Kin when nothing could yet be bought with it. On September 30, 2020 the Southern District of New York granted summary judgment for the SEC and found that the private and public sales were a single integrated offering. Kik paid a $5 million penalty under the October 21, 2020 final judgment.
  5. LBRY, a New Hampshire company behind a video-sharing application, never held an ICO. The SEC alleged it sold ‘LBRY Credits’ (LBC) from at least July 2016 to February 2021, receiving more than $11 million in dollars, bitcoin and services. On November 7, 2022 Judge Paul Barbadoro of the District of New Hampshire granted summary judgment, holding that no reasonable fact-finder could reject the SEC’s claim and rejecting LBRY’s ‘fair notice’ defense: nothing in Howey suggests that only ICOs must be registered, and holding an ICO is relevant but not decisive. On July 11, 2023 he enjoined LBRY and imposed a $111,614 penalty, after the SEC dropped disgorgement in light of LBRY’s limited funds.
  6. The judgments stand, but the backdrop has moved. The SEC’s March 2026 interpretation names LBRY Credits, along with assets such as bitcoin and ether, as ‘digital commodities’ that are not themselves securities, while stressing that a non-security asset can still be sold subject to an investment contract (lessons 3.1.4 and 3.2.2). The cases were about the sales, not the token forever. A practical check: compare a project’s distribution with these three. Were early buyers likely conduits to the public? Were presale and public sale one plan? Were treasury sales continuous? Exemptions are covered in lesson 3.2.6.

Key facts

  • The SEC’s October 11, 2019 complaint said Telegram sold about 2.9 billion Grams to 171 initial purchasers and raised more than $1.7 billion.
  • The Southern District of New York preliminarily enjoined delivery of Grams on March 24, 2020.
  • Telegram’s June 26, 2020 settlement required returning more than $1.2 billion to investors and an $18.5 million civil penalty.
  • On September 30, 2020 a federal court granted summary judgment that Kik’s Kin sales were investment contracts and that its private and public sales were a single integrated offering.
  • LBRY was ordered on July 11, 2023 to pay a $111,614 civil penalty and was permanently enjoined from unregistered crypto-asset securities offerings.
  • The SEC’s March 2026 interpretation lists LBRY Credits (LBC) as a digital commodity that is not itself a security.

Exercise nine, six, three, one

9CollectList up to 9 features of a token distribution you know: who bought first, at what discount, with what lockups, through which channels, and over what period.
6ClusterSort them into 6 groups: private sales to large buyers, public sales, continuous treasury sales, resale plans or lockups, promises made to buyers, and use of the token at the time of sale.
3DistillReduce the 6 groups to 3, one for each case pattern: Telegram-style planned resale, Kik-style integrated presale and public sale, and LBRY-style ongoing sales without an ICO.
1CrystallizeWrite 1 sentence explaining why a court can treat a token’s sales as securities offerings while the SEC later says the token itself is not a security.

Fact check

Dates, figures and claims checked against the published sources listed below.

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