Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge. When he's not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.
The SEC is looking to stop Telegram from issuing its GRAM tokens, for violating the Commission’s rules. Telegram is yet to make an official decision, however, how much of a play does the company have?
In an interesting but not entirely surprising turn of events, the United States Securities and Exchange Commission (SEC) has asked Telegram to halt issuance of its forthcoming GRAM tokens. In a press release dated Oct. 11, the Commission said that it had already “filed an emergency action” and also a restraining order against Telegram Group Inc. as well as TON Issuer Inc., a subsidiary of the former. This came just a few weeks before Telegram promised to officially issue the tokens to investors which bought into its $1.7 billion token sale, conducted back in 2018.
The SEC’s Grudge
According to the Commission, the conducted token sale was illegal because even though it’s an offshore company, it received investment for its tokens, which the SEC considers a security, from investors in the U.S. as well. Specifically, 1 billion GRAM tokens were purchased by U.S. investors. However, the SEC notes that Telegram not only did not register, but has also withheld information from its investors. SEC Division of Enforcement Co-Director, Stephanie Avakian, 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,”
Telegram, specifically “TON Issuer Inc”, filed a “Form D” application with the SEC back in February last year. This type of filing allows a company to sell a security provided two rules (exemptions) are met.
- Exemption One – 506(b): This states that the company can go ahead to sell, but is prevented from advertisements. As part of the requirements, the securities must only be offered to investors that have been accredited or a maximum of 35 investors that haven’t been accredited. These non-accredited ones, however, must be investors who “have knowledge and experience in financial and business matters” and are fully able to understand all “merits and risks of the prospective investment.”
- Exemption Two – 506(c): The company can run token sales provided that the sales are strictly offered to accredited investors alone. Under this exemption, the company is also allowed to run advertisements.
Telegram’s filing was done through 506(c), and was only sold to accredited investors. The problem here is that Telegram, once the tokens are issued, would then allow these investors to flood the market, letting pretty much anyone buy tokens that were supposed to only be sold to accredited investors. This re-sale is currently the only way initial investors can pull in any profits.
Telegram has now responded to its investors, on the SEC’s move. In a letter to its investors, the company claims to have been trying to get right with the SEC for about 18 months now, and disagrees with the SEC’s decision.
“We were surprised and disappointed that the SEC chose to file the lawsuit under these circumstances, and we disagree with the SEC’s legal position”, wrote the team.
Telegram has not taken any decisive moves yet, but is open to delaying the token issuance, to find a more lasting solution. However, a court hearing regarding the temporary restraining order has been set for Oct. 24.
Which Way Forward?
The SEC is quite known for biting down on the cryptocurrency sector and has gone to war with a few companies in the rest, most recently Block.One. The Commission has also been extensively condemned for its failure to properly clarify its stand on the crypto sector and ICOs as well.
Until then, Telegram could decide to go ahead with the issuance and ignore the SEC. However, this could turn out quite roughly for the company, which could end up losing not just its credibility, but also a lot of resources with court cases. Telegram could also halt its issuance in the U.S. and continue with other countries, which could reduce the company’s problems
However, this might not be as easy as it seems because more than half of the $1.7 billion it raised, came from the U.S. Lastly, Telegram could comply with the SEC and be forced to pay very heavy fines and postpone its issuance until next year. As heavy as these fines could be, the company could possibly still come out on top and receive more investors when interested parties see that it has gotten right with authorities.