The Securities and Exchange Commission (SEC) has filed an emergency action and obtained a temporary restraining order against Telegram. The SEC targeted two offshore entities conducting an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds.
According to the SEC, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital in January 2018 to finance the companies including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger.
Telegram did file a form D (506c) in 2018 indicating its intent to raise capital from accredited investors. The SEC states that Telegram is in violation of registration requirements of the federal securities law.
The SEC alleges that once the tokens are distributed to the initial purchasers they will be resold to the investing public on the open market. In effect, a public offering of an unregistered security.
The complaint states that, upon issuance, Grams are expected to be immediately available on digital-asset trading platforms, including certain ones located in the United States.
“One popular United States-based digital-asset trading platform with which Telegram has engaged, for example, posted on its blog that it is considering whether it will sell Grams, and noted in internal documents that there is high interest from retail investors in investing in Grams,” states the complaint.
Telegram has emerged as a popular messaging app within the crypto community as well as around the world. Telegram has a reputation for providing a messaging service that is secure and values the privacy of its users – important in countries where freedom of speech is lacking.
The SEC states that the defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers for around $424.5 million.
Telegram apparently promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets.
The SEC ‘s complaint alleges that defendants failed to register their offers and sales of Grams, which are securities.
“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”
Steven Peikin, Co-Director of the SEC’s Division of Enforcement, stated:
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token. Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
The SEC’s complaint, filed today in federal district court in Manhattan, charges both defendants with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
The SEC has recently stepped up its pace of enforcement regarding digital assets that may have broken existing securities law. Recently, Block.one, creator of EOS, settled with the SEC for several million dollars on an ICO that raised about $4 billion.