Leading privacy-focused messaging service Telegram is in trouble with the US Securities and Exchange Commission (SEC) following its sale of tokens to US investors last year.
The SEC considers the sale, which was conducted under wraps attracting the interest of most investors but only allowing 171 investors to participate in a private sell, illegal.
The SEC is one of US’s several financial markets watchdogs. In the recent past, the commission has had a particular interest in the sale of cryptocurrency-related tokens to investors by blockchain companies or traditional companies branching out to the blockchain space. Case in point, the KIN token sale by social media company Kik Interactive and most recently the sale of EOS tokens by Block.one. In the last case, the SEC managed to fine Block.one as little as $24 million for its year-long token sale between 2017 and 2018 in which it raised more than $4 billion in what the SEC terms a sale of illegal securities.
Back to the Telegram TON sale and the SEC says the same thing. According to a press release by the SEC on Friday, Telegram’s Gram tokens which were sold last year are securities and Telegram through its wholly-owned subsidiary TON Issuer Inc. are in violation of the US securities laws by not fully marketing it as a security and not divulging all the information necessary to investors.
The SEC claims that out of the 2.9 billion Gram tokens sold to investors, a billion of these were purchased by 39 US investors, which brings the sale under the purview of the commission. Telegram and TON Issuer Inc. sold the tokens under a Simple Agreement for Future Tokens (SAFT) arrangement which means that the investors gave the money with the expectation of receiving tokens at a later date.
On or before October 31st this year, the tokens are to be distributed to the purchasers but to prevent that, the SEC has secured a Temporary Restraining Order from a Manhattan Federal Court. In addition, the SEC got itself a date with Telegram in court on October 24th as it seeks a permanent revocation of the sale of the Gram tokens to US investors.
Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold.
Stephanie Avakian, the Co-Director of the SEC’s Division of Enforcement said on Friday in a statement.
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, a fellow co-director to Avakian added to her sentiments saying that:
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.
Telegram is preparing to launch its Open Network (TON) on October 31st as per its agreement with the investors. The $1.7 billion funds it raised in the 2018 ICO are presumably begin used to cater for the development of the TON blockchain and ecosystem. However, the SEC has just thrown a massive roadblock expected to stall the launch of the project if not completely halt it.