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SEC stops Telegram messaging app's $1.7B digital token offering

James Leggate

The Securities and Exchange Commission took emergency action against the company behind the messaging app Telegram on Friday to stop it from moving ahead with an unregistered digital token offering that officials said had already raised more than $1.7 billion from investors.

The Dubai-based Telegram sold about 2.9 billion digital tokens at a discount to 171 purchasers, including 39 Americans, since January of 2018, SEC officials said. U.S. purchasers invested a total of $424.5 million in the tokens, called “Grams.”

Officials alleged that Telegram and its wholly-owned subsidiary, Telegram Open Network or TON Blockchain, failed to register their sales and offers of Grams, which the SEC considers securities.

Telegram has said the Grams were currency, not securities, according to court records.

Telegram Messenger first launched in 2013. The app is free and it doesn’t sell ads. In 2017, the company announced plans to work on blockchain systems and cryptocurrency. It sold Grams to investors in two rounds of offerings, first at $0.37 per Gram and then at $1.33 per gram, according to the SEC’s complaint. The launch “reference price” for Grams was listed at $3.62.

Stephanie Avakian, co-director of the SEC’s enforcement division, said Telegram failed to provide investors with information about the business’ operations, financial condition or other factors required by U.S. securities laws.

Telegram was preparing to distribute Grams, and their release would have allowed their holders to sell billions of them into U.S. markets, SEC officials said. The company released a beta version of the TON Blockchain in March and recently released the TON Wallet. It had promised to deliver the Grams by Oct. 31.

“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” Avakian said.

The SEC’s action against Telegram came the same day that the Libra Association saw several more companies — including Visa and Mastercard — back out of the Facebook-supported cryptocurrency group.

An updated Telegram terms of service indicated the company may have had plans similar to those laid out by Facebook CEO Mark Zuckerberg, who has said the Libra cryptocurrency could eventually be exchanged through Facebook’s Messenger app. The new Telegram terms mention the Grams Wallet being incorporated into its Telegram Messenger app.

The Geneva-based Libra Association has said it will not launch a cryptocurrency until it has addressed regulators’ concerns. But two U.S. senators wrote an open letter expressing concern earlier this week about the project.

Steven Peikin, co-director of the SEC’s enforcement division, said that regulators will not allow issues to avoid securities laws by labeling offerings a cryptocurrency or 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,” he said.

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