Telegram vs the SEC: the fight over token distribution

Bad news for investors. It seems that Telegram tokens won’t be released and distributed this month, as expected. The initial offering was illegal, according to the United States Securities and Exchange Commission (SEC). 

The regulator filed an emergency action against Telegram Group and its subsidiary TON Issuer regarding the sale and distribution of the digital-asset Gram tokens, now labelled as securities.  

Telegram failed to register its sale with the SEC, so the Commission asked for a temporary restraining order that prohibits the company from distributing any unregistered securities.  

In response, Telegram has voluntarily ceased the sale and distribution of its Telegram tokens (Grams). The company has also asked a federal court to deny the motion. 

An illegal $1.7 billion offering of Telegram tokens

To understand the conflict between the Telegram Group and the SEC, you need to go back to the company’s offering that started at the beginning of last year. 

According to the SEC, Telegram started raising capital between January and March 2018 to build the Telegram Open Network, also known as the TON Blockchain. The company raised $1.7 billion from sales, as 171 initial purchasers bought around 2.9 billion Grams. From these, 1 billion Telegram tokens went to 39 US investors. This means that around $424 million was capital from the US market, which trips into the territory of US regulators. 

The company committed to delivering the Telegram tokens by October 31, 2019. However, this seems to be a jinxed date that neither the Russian company nor the British government can deliver on. 

The key problem is that Telegram and the SEC don’t agree on the nature of the Telegram tokens. The Commission sustains that Grams are securities, which means that Telegram needs to register them with the SEC. However, Telegram Group and TON chose to use exemptions of the law to sell the Telegram tokens. 

Now, the SEC claims that the initial offering was illegal. As a consequence, the Commission asked authorities to issue a temporary restraining order and a preliminary injunction against the two companies “prohibiting them from participating in any offerings of unregistered securities”.

This action is meant to keep Grams away from the market so that US investors can’t have access to unregistered Telegram tokens. It’s a way to protect citizens from risks that they may not be aware of. The regulator mentions in the complaint: 

“Defendants plan to sell billions of securities that will quickly come to rest in the hands of US investors without providing those investors important information about their business operations, financial condition, risk factors and management.”

Explaining the exemptions used by Telegram

All companies selling securities in the United States should register with the SEC, according to the Securities Act of 1933. The exemptions used by Telegram refer to companies that plan to sell a security without registering it.

The two exemptions, 506(b) and 506(c), apply in two situations: 

• When companies sell exclusively to accredited investors–506(c)
• When companies sell to accredited investors and up to 35 non-accredited investors defined as “sophisticated”–506(b)

According to the SEC, a sophisticated investor has enough experience of the market and the knowledge necessary to foresee the risks of an investment. 

Telegram issued its initial offering under the 506(c) exemption, meaning that only accredited investors could close purchase agreements. However, once these investors receive the tokens, they can resell them to the open market. This means that people with no accreditation and little knowledge in this field could buy Grams without having a clear view of the risks.

Telegram’s side of the story

In return, Telegram Group and TON Issuer claim that Grams are not even securities. In answer to the SEC’s complaint, the two companies sustain that they haven’t sold any securities through their ICO. 

“Telegram entered into private purchase agreements with a limited number of highly sophisticated purchasers (the “Private Placement”) that provided for the future payment of a currency (Grams) but only following the completion and launch of the TON Blockchain.”

Telegram Group and TON Issuer also accuse the SEC of having delayed all legal procedures until the last minute to “to gain a strategic litigation advantage”.

According to the agreement with the initial purchasers, Telegram must return the funds raised if it doesn’t launch TON Blockchain by the end of October. This scenario seems possible without any tokens to power the network. 

Final thoughts

At first glance, it seems as if Telegram has tried to surpass the Securities and Exchange Commission by using exemptions of the law and further legal loopholes. And the company is ready to fight back to obtain the right to move on with its token distribution. 

Even if the two companies win the battle, though, this may still affect the performance of the Gram token. With all the negative publicity, it’s hard to tell whether the initial purchasers will manage to resell the tokens and make a profit.