The SEC Nukes $1.7 Billion Telegram ICO for Securities Violations, Destroying a Major Cryptocurrency Before it Even Launches. Will Telegram Messenger Survive?

October 14, 2019 / by Crypto.IQ

The Securities and Exchange Commission (SEC) has issued a lawsuit against Telegram Group Inc. its -oriented subsidiary TON Issuer Inc. the United States District Court for the Southern District of New York. This lawsuit essentially kills the $1.7 billion Telegram initial coin (ICO) that sold the Grams token. This is actually the 2nd biggest ICO in history behind the $4.2 billion EOS ICO. Essentially, the world is witnessing the death of a top 10 before it ever launches.

The Telegram ICO took place from January through March 2018, well after the SEC declared in July 2017 that ICOs must follow federal securities regulations. Out of the 2.9 billion Grams sold in the ICO for $1.7 billion, more than one billion Grams were sold to United States investors for $424.5 million. 

Telegram failed to register the Telegram ICO as a securities offering, which is required under the Securities Act of 1933. The registration provides securities investors with information regarding business operations, risk factors, financial conditions, and management so that investors can make proper decisions based on the data. Instead, Telegram ICO investors made their decisions based on hype, press releases, and investment packets. 

In an attempt to conduct the ICO via a loophole, Telegram claimed that Gram Purchase Agreements are securities and included a warning that the offer of the security had not been registered under the Securities Act. Simultaneously, Telegram claimed that the Grams was a currency and not a security and failed to warn investors that Grams tokens could not be sold in the United States. 

The SEC aggressively down this loophole. First off, Grams is not a currency since nothing can be purchased with Grams at the time of the ICO to the present. Telegram claimed that Grams could be used in the future to purchase anonymity and cloud computing/storage services as well as other services, but these services have yet to be developed, and their development depends entirely on the ICO money. 

Also, Telegram released several documents to investors explaining how the Grams token would appreciate in value. 250 million free Grams would be distributed to Telegram users, onboarding their user base of 170 million people, and the Grams tokens distributed in the ICO were sold for far less than the expected market value of $3.62 at launch. Essentially, Grams investors were told that they could make quick profits on launch day since the rate they bought Grams at was a highly discounted price. Further, Telegram claimed they would leverage their communities, developers, and merchants to drive demand for Grams. 

This meets all the SEC definitions to classify a token as a security. Investors purchased Grams in expectations of profits, profits depended on the success of Telegram Messenger and the Telegram Open Network (TON) , the funds raised in the ICO were necessary to make TON a reality and give Grams value, and the Grams were sold by a centralized company. 

To make matters worse, the $1.7 billion raised in the ICO was more than needed to develop the TON. Explicitly, Telegram says that between 2019 and 2021 $520 million will go towards developing the Telegram Messenger and other corporate costs, and by January 2019 $219 million had already been spent. This means investments into the Grams ICO are also a direct investment into Telegram Messenger. 

Overall, the SEC shows how Telegram got all the benefits of an initial public offering (IPO) without going through any of the regulatory processes, leaving investors at risk. 

There are some other highly negative factors as well. The TON Foundation, which is completely controlled by Telegram, would initially own 2.1 billion Grams. This would give Telegram the power to easily manipulate the Grams market, which is unfair to traders and investors. Further, Telegram indicated that the TON Foundation would have a majority of the stake in order to remain in control of them, so that Telegram’s development vision for TON could succeed. 

Essentially, if the SEC did not stop Telegram, the TON would have been completely centralized, and the Grams market would be centralized as well, which is against the values of the crypto space. 

Finally, the reason the SEC is acting now is that Telegram planned on distributing Grams to ICO purchasers on October 31, at which point the Grams would have circulated through the United States in an uncontrolled fashion via exchanges and messaging on Telegram . This would violate know your customer (KYC), anti-money laundering (AML), and securities regulations. 

The SEC is requesting a temporary injunction to prevent the initial distribution of Grams and the destruction of any documents relevant to the Grams ICO and TON. Beyond that, the SEC is requesting a permanent injunction to prevent Telegram from ever doing an ICO in the future. 

The real kicker is that the SEC is seeking a complete refund of the $1.7 billion that was raised in the ICO, in addition to retroactive interest and civil penalties. Not only will this completely kill the Grams and the TON before it ever even launches, but it is also perhaps possible that this will force Telegram into bankruptcy since hundreds of millions of dollars of ICO money have already been spent. 

Of course, Telegram has the option of fighting the SEC in court. However, Kik Messenger has recently tried to fight the SEC over the 2017 $100 million Kin ICO, and ultimately Kik spent so much money on legal fees that they were forced to shut down their messaging business, and the lawsuit continues. 

At the least, the world is witnessing the destruction of the 2nd biggest ICO in history, which is a clear warning to the rest of the crypto space that ICOs in the United States is strictly prohibited. It remains to be seen if Telegram will be threatened by this SEC lawsuit, which would be a major loss since it is one of the most popular messaging apps used by the crypto space. Also, it remains to be seen how many more ICOs that have already been conducted will be attacked by the SEC.