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On October 11th 2019, the U.S. Securities and Exchange Commission (SEC) has been granted a temporary restraining order which resulted in the halting of Telegram’s ICO. The offering went on to raise nearly $2 billion but constitutes an illegal, unregistered securities offering, according to the SEC.
The SEC and Telegram’s ICO Explained
Telegram Group Inc., and its wholly-owned subsidiary TON Issuer Inc., started an ICO back in January 2018.
During the ICO, nearly 3 billion digital tokens were sold to 171 investors. Over one billion of those tokens, dubbed “Grams”, were sold to 39 U.S.-based investors.
The funds raised were said to finance the companies’ business, including the development of their own blockchain called the “Telegram Open Network”, also referred to as the “TON Blockchain”. Funds were also planned to further develop the popular mobile messaging application, Telegram Messenger.
Telegram told investors that Grams would be delivered no later than October 31st 2019. Upon receipt, investors were told they would be able to sell their Grams in U.S. markets.
However, the SEC alleges that both entities— which are based offshore— failed to register their offers and sales of Grams. The Grams, says the SEC, are indeed securities, resulting in a violation of the registration provisions of the Securities Act of 1933.
Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said,
“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold. 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 of the SEC’s Division of Enforcement added,
“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.”
Ultimately, the SEC is seeking certain emergency relief, permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
The SEC has continued to show increased enforcement when it comes to digital assets used as a fundraising vehicle. Recently, they have especially penalized a number of unregistered securities offerings, including Block.one, Bitqyck, SimplyVital Health, and Kik.
The SEC has published guidance which many have interpreted as showing how every ICO constitutes a securities offering.
As a result, companies looking to raise funds through digital assets can leverage the regulatory-compliant Security Token Offering (STO) as a viable alternative to the ICO.
What do you think about the SEC halting Telegram’s ICO? Let us know what you think in the comments section below.
Image courtesy of Telegram.