The US Securities and Exchange Commission (SEC) has filed an emergency action against the popular messaging app Telegram, Inc. and Ton Issuer, Inc. for an “ongoing illegal offering of digital-asset securities called Grams.” In addition to its suit, the SEC also obtained a temporary restraining order (TRO) against the company to prevent it from further distributing and selling its Gram tokens in the United States.
According to the regulators, the company sold 2.9 billion Grams at discounted prices to 171 initial purchasers worldwide, raising $1.7 billion in the process using a Simple Agreement for Future Tokens (SAFT). The SEC says that $424.5 million of the sale proceeds come from American investors and that the defendants are about to sell more to Americans, all without registering its offering with its office, in clear violation of the Securities Act of 1933.
Why the SEC Order Against Telegram Is More Than Just ‘Marketing Grams’
This TRO was the smartest move the SEC could have done to avoid what could have been and would have been an absolute legal shit show. As the SEC pointed out, Telegram committed to delivering Grams by 10/31 and expects to sell more at the same time.
“Once these resales occur, Telegram will have completed its unregistered securities offering with billions of Grams trading on multiple platforms to a dispersed group of investors,” the SEC stated. Once the tokens are available on public markets, the SEC points out it will “be virtually impossible to unwind the transactions” given the “variety of unregulated markets” they will trade. This is one more reason why the SEC sought (and received a TRO).
The SEC isn’t playing around. It’s time these companies recognize this. It’s been very upfront and clear for several years now that most tokens offered by these companies qualify as securities and must comply with federal regulation.
Look, if the company isn’t sure about whether its token offering qualifies as a security or not, the worst that can happen is when they notify the SEC, they are told they must register. I’m not sure why short-cutting the SEC and investors, especially wealthy ones, is worth the trouble and headache.
While it’s difficult to say how this order will affect the launch of Gram tokens, it’s clear the company is in quite the legal pickle. Former SEC attorney Zachary Fallon told Bloomberg that this SEC enforcement action could also complicate the company’s future ability to sell its tokens in other countries.
As a practicing attorney myself, I completely agree. The New York Times reported back in August that Telegram promised investors it would deliver Grams by October 31st or return their money.
The SEC’s current enforcement action against Telegram is the highest-level action taken to date. This means this is far from over and will have some legal ramifications for Telegram and consequences for its short-cutting.
On its face, while it would appear the main concern stemming from the SEC’s order is about marketing Grams, there’s actually a much bigger concern here for the company—its ability to continue selling its tokens abroad in other jurisdictions based off the risk international investors are willing to take knowing they are now the prized watchdog of the SEC.
What this SEC Order and Lawsuit Will Teach Us
“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “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.”
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token,” Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Seriously, stop testing the waters. It’s not going to work. This is a huge hit against Telegram and the once thought viable Gram.
Telegram’s Gram offering was very well received among cryptocurrency enthusiasts, including many of the exchange platforms. This current action will do two things—legally establish the standard and seriousness the SEC has for token offerings and force the U.S. courts to now take a clearer stance in the world of digital monies and security offerings.
The SEC’s complaint, filed today in federal district court in Manhattan, charges both defendants with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act, and seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
This lawsuit is filed in a U.S. federal court instead of in an administrative proceeding in front of the SEC itself. The reason for this may be because (according to the Court’s Order, which was prepared by the SEC), Telegram refused to accept service of a subpoena from the SEC. If so, it’s no surprise that the SEC went to federal court to seek quick and emergency relief. Evidently enough, a federal judge has more immediate raw power than an administrative law judge and also can issue rulings that become precedent in other cases.
The SEC’s investigation is being conducted by Daphna A. Waxman, Morgan B. Ward Doran, and John O. Enright of the SEC’s Cyber Unit. The case is being supervised by Carolyn Welshhans, Acting Chief of the SEC’s Cyber Unit and Lara Shalov Mehraban, Associate Regional Director of the New York Regional Office. The SEC’s litigation will be led by Jorge G. Tenreiro and Kevin McGrath.