On Friday, the US Securities and Exchange Commission (SEC) filed a legal complaint against Telegram and its subsidiary, Telegram Open Network (TON), over its unregistered initial coin offering (ICO).
Grams, the digital assets sold in the ICO, are a cryptocurrency which without the TON blockchain and Telegram messenger have no value, according to the defendants. However, the SEC believes the offering was an illegal sale of securities.
Telegram’s ICO is the second largest to date, behind only Block.one’s EOS token sale of 2017-18. In the case of EOS, the blockchain firm raised around $4 billion, including from consumer investors, and settled its dispute with the SEC for $24 million two weeks ago.
Meanwhile, Telegram sold 2.9 billion Grams for $1.7 billion between January and March of last year. At the time, the digital assets were offered as currency with future applications including an exchange of value on the TON blockchain, enabling network storage, and purchasing domain names. The EOS system was also not yet live at the time of its ICO, but launched shortly afterwards in June 2018.
A sale of securities…?
The firm aims to use the 200 million-strong userbase of the Telegram messenger to bring distributed ledger technology (DLT) to the masses. Plus, as a collection of chains, it claims that the TON blockchain can achieve millions of transactions per second while running smart contracts and storing files. These capabilities eclipse that of more popular blockchains like Ethereum.
However, the SEC argues these promises were an investment pitch since the blockchain didn’t exist at the time of the ICO and no significant uses for Grams exist even now. Indeed, the offering was somewhat controversial at the time for its huge value and vague technical details.
Telegram’s original documents said that its blockchain, and hence Gram functionality, would be released no later than October 31st, just over two weeks away. The firm launched the TON Wallet this month and gave purchasers until the 16th to sign up with an address to receive Grams.
…The SEC thinks so
While testing of the TON blockchain has begun and dedicated smart contracting language Fift has launched, the SEC still sees Grams as securities. Friday’s complaint reads: “The TON “ecosystem” did not exist and does not exist today. There are not now and have never been any products or services that can be purchased with Grams.”
Unlike many ICOs, including Block.one’s, Telegram offered the digital assets to professional investors rather than the public. Indeed, only 171 purchasers funded the $1.7 billion ICO. As the SEC claims, these purchasers were led to believe that Grams would form a relatively stable and profitable investment.
One of its arguments is that the firms supposedly said that purchasers could expect a “plausible 10-50x return” on Grams, leading a professional investor to buy $27.5 million of tokens. That investor allegedly commented that while Telegram’s products were overambitious, he bought Grams because they “could be worth an investment”.
Additionally, Telegram sold more tokens and raised more funds than could have a plausible use on TON, said the SEC. It also suggests that purchases reasonably expected “that Telegram’s financial interests would be aligned with [theirs]”. But the TON Foundation is solely run by founders Pavel and Nikolai Durov.
The timing of the legal action by the SEC is critical. Right now only professional investors are exposed. But once the TON network is up and running – as is planned this month – and the tokens are in circulation, then consumer investors could be exposed to investment risks, if TON is an unregistered security. Hence the SEC is trying to stop the “ongoing illegal offering of digital-asset securities called Grams.”
The SEC has another ongoing lawsuit over Kik’s $100 million ICO, which Kik insists did not constitute a sale of securities.
This article has been updated
