According to the SEC’s complaint, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital in January 2018 to finance the companies’ then-existing Messenger business and the development of their own blockchain, the “Telegram Open Network” or “TON.” In their token offering, they sold approximately 2.9 billion Gram tokens at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers (read SEC press release here). In a new court filing, the SEC explains in more detail why they qualify the Gram token as a security and hence the private token placement as an unregistered security offering.
The SEC emergency action explained
Telegram promised to deliver the Gram tokens to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019. At this time the purchasers and Telegram would be able to sell billions of Grams into U.S. markets. Those Grams are securities in the judgment of the SEC.
In October 2019, the SEC has filed an emergency action and obtained a temporary restraining order against the two Telegram offshore entities Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. which conducted 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, the emergency action is intended to prevent Telegram from flooding the U.S. markets with their Gram tokens that we allege were unlawfully sold. The complaint alleges that defendants failed to register their offers and sales of Grams, which are securities, in violation of the registration provisions of the Securities Act of 1933.
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.Steven Peikin, Co-Director of the SEC’s Division of Enforcement.
Gram securities – Telegram’s need for funds
One of the main reasons why the SEC qualifies the Gram token as security is that funds were raised through the issue of the Gram token to also finance the then-existing business – Telegram Messenger. In this respect, instead of the shares, the Gram token was issued as a block-chain-based financial instrument and security substitute.
From 2013 up until the time of the TON offering, Telegram co-founder Pavel Durov funded Messenger exclusively with his personal savings resulting from the sale of his social media network “VKontakte” or “VK.”
In 2017, Messenger needed funds to keep buying more equipment and continue funding its growth, The SEC claims in its new Court filing. Selling equity (shares), however, was not the best option for Telegram because it was concerned it could affect the company’s integrity, values, ethos, and what it stands for.
Hence, Telegram first considered doing a public token offering to raise funds for Messenger’s corporate purposes and the development of the blockchain-based Telegram Open Network (TON) and its Gram token. They gave up the idea, however, because a public token offering in the United States could be treated as an unregistered security offering.
From the time of the Offering, “way over 90” percent of Telegram’s expenses have been funded from Offering funds. Since the Offering, Telegram has not distinguished between the money
spent on Messenger and money spent on TON.
Gram securities – Profits please”
The second main reason why the SEC considers grams to be securities is that investors primarily wanted to make a profit from their investment and did not want to participate in the TON.
Telegram used a Two Page Teaser to market Telegram’s fundraising efforts. In it, it was referred to a Simple Agreement for Future Tokens (SAFT) which provided investors with the right to receive TON tokens called Grams with a deep discount:
The discount for private sale will exceed 50% of the initial public sale price, and the team expects it to exceed 70% of the price of the last token sold.Telegram SAFT
Telegram targeted sophisticated and reputable investors with their offering. The SEC presented the sworn declaration of eight initial purchasers to the court outlining, among other things, their views on the TON investment. These investors evidently regarded the Gram token as an investment and did not purchase it for consumptive use. According to the SEC Complaint, they invested into Grams in order to profit by selling the tokens on secondary markets once the lockup
period was over.
Telegram, on the other hand, has argued that Gram tokens are primarily a means of participating in TON and not speculative security.
Conclusion – Telegram violates U.S. Securities Act
Telegram offered and sold securities and intends to offer and sell Grams to the public in the future. The federal securities laws require that these investors be provided with adequate disclosures regarding the investment and any of the risks associated with it. Thus, SEC asks to court to enter an Order temporarily and preliminary, and a Final Judgment permanently, restraining and enjoining Telegram and their associates from any ongoing and future violations of the U.S. Securities Act by delivering Grams, or taking any other steps to effect any unregistered offer or sale of Grams