Update October 16, 2019: Coindesk reports that Telegram is proposing an extension of the launch deadline from October 31, 2019 to April 30, 2020 to investors.

On Friday, October 11, 2019 the SEC filed an emergency action to halt the launch of Telegram’s blockchain, the Telegram Open Network, and the distribution of the platforms upcoming native token, Gram. ‍



The full SEC complaint is concise, coherent, and easy to read. You can access the full SEC complaint here (PDF), and the SEC's accompanying press release here.

Key Facts



Between January-March of 2018, Telegram raised $1.7 Billion USD in a private sale of “Grams” - the native crypto-token that would power Telegram’s blockchain, the Telegram Open Network



Of the $1.7B raised, $424.5 million was raised from 39 U.S. based accredited investors.



Telegram's position during the sale process had been that, while the Gram Purchase Agreements were investment contracts (ie: securities), the Grams themselves were currency.



Under this presumption, during the initial phase of the sale, Telegram filed a Form D Exemption with the SEC for the Gram Purchase Agreements.



Under Regulation D of the Securities Act of 1933, companies can sell securities without registering with the SEC if they meet certain qualifications.



Included among these qualifications is the condition that the securities being sold contain restrictions on their resale.



Critically, Telegram placed no restrictions and made no filings for the re-sale of the Grams themselves:

While Telegram’s position is that the Grams themselves aren’t securities, the SEC’s position is that they are, because they represent:



A) An investment of money,

B) In a common enterprise,

C) With an expectation of profits,

D) Derived primarily from the entrepreneurial and managerial efforts of other individuals

Further, the SEC notes that Grams are not a currency because they have "no realistic currency uses at this time”.

What the SEC Wants

Through this injunction, the SEC is seeking the following:



To stop Telegram and all related parties from distributing the Gram tokens

To stop Telegram and anyone associated from destroying, altering, concealing, or otherwise interfering with the access of the Commission to relevant document

To grant the SEC “expedited disccovery” (i.e. to grant the SEC the ability to quickly obtain evidence from Telegram themselves)

For Telegram to “disgorge all ill-gotten gains, including prejudment interest thereon"

To prohibit Defendants from participating in any offering of digital asset securities

For Telegram to pay civil money penalties.‍



Adding to the inconvenience for Telegram, is that in the Gram Purchase Agreement, Telegram promised to distribute the Grams to initial purchasers upon the launch of the Telegram Open Network no later than October 31, 2019, or else they would commit to returning all the funds raised, minus expenses incurred.



This fact makes the timing of the SEC injunction particularly inconvenient for the Telegram team, as they must now scramble to respond and handle the SEC complaint with the looming threat of a contractual obligation to completely disburse the funds if their own self-imposed deadline is missed.

Telegram’s Interim Statement



Telegram released an intererim statement to Telegram investors and exchange partners on Sunday, October 13.



To our investors,

As you may have seen, on October 11, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit in U.S. federal court against Telegram Group Inc. and TON Issuer Inc. seeking to prevent the launch of the TON blockchain. Consistent with the SEC's stated desire to engage with developers of digital asset technologies, Telegram has attempted to engage with and solicit feedback from the SEC for the past 18 months regarding the TON blockchain. 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.



Together with our advisers, we are continuing to evaluate the best means by which to resolve the situation in the interests of relevant parties, including but not limited to assessing whether to seek to delay the launch date. We are working diligently to promptly address these issues and expect to provide further updates over the next week.

Kind regards,

Another full response is expected in the coming week.



Possible Outcomes



Here are a few possible scenarios that Telegram might move forward with in response to this injunction.

Telegram Refunds US Investors‍

The U.S. SEC has jurisdiction only over the sale of securities in the U.S., to U.S. based investors and citizens, not globally.



Given this fact, Telegram refunds the $425M + interest to US investors, and pays a fine to the SEC for committing the infraction. Telegram continues with their launch of the Telegram Open Network, with some stipulations in place that Grams not be sold to US investors, and the SEC pressures US-based exchanges (Coinbase, Binance USA, etc…) to not list the tokens.



We believe this to be the most likely scenario.

Telegram Files With SEC

Telegram will pay a fine to the SEC for committing the infraction, then will file with the SEC in recognition that Grams are securities and moving forward with the token distribution in a way that is compliant, accordingly.



Blockstack recently paved the way for this SEC-compliant tokens-as-security registration, so there’s precendent here. But the admission that Grams are securities would add significant legal friction to the flow of Grams through the Telegram economy, making this an unpalatable outcome for Telegram.



Telegram Settles With SEC‍

Telegram reaches a settlement with the SEC, agreeing to pay a fine for committing the infraction. They proceed with deploying the blockchain, and tokens are distributed to all investors including the US initial purchasers.

The SEC is unlikely to agree to this scenario, making it an unlikely outcome.

Telegram Ignores SEC. Continues Without Permission



Under the direction of notoriously anti-authoritarian Pavel Durov, Telegram decides to continue with the TON launch, without regard to the SEC restraining order.



This outcome seems extremely unlikely given the investor money on the line, and the ability of the SEC to pressure the US Department of Justice to subsequently apply pressure to Apple and Google to remove Telegram from the US App Stores.



Telegram Returns All Funds, Continues Anyway

If Telegram returns all the ICO funds, we believe it’s likely Pavel will continue to fund the development of TON, perhaps along with another private investment round excluding US investors.



***



In any scenario (and we are obviously biased towards optimism in this department), it’s hard to imagine a scenario in which the Durovs and the Telegram team fully abandon their vision of bringing the Telegram Open Network online, especially at the behest of a government regulator.



Throughout their careers, the Durovs have proven to be uniquely principled and anti-authoritarian in their decisions - so, if anything, this SEC injunction will likely add fuel to their fire.



For that reason alone, we’re still optimistic about the future of Telegram and the Telegram Open Network, and anxiously await the next moves by Telegram and watching how this drama will unfold.



Other Takes

David Gerard

"The Telegram Open Network is probably dead. The emergency order stops Telegram from “delivering Grams to any persons, or taking any other steps to effect any unregistered offer or sale of Grams.” This is worldwide — not just for the US.” (DavidGerard.co.uk)

‍

[We respectfully disagree with David on this point. The Durovs rejected Russian requests for censorship on VKontakte on principle before. It’s unlikely they’ll fully abandon their vision for the Telegram Open Network due to US regulators (who can’t claim jurisdiction outside the US)]

Preston Byrne

"Despite what the SEC paints as a pretty open-and-shut case, Telegram’s counsel is Skadden, Arps, which is a little strange seeing as one would think a firm as expensive as Skadden might have seen this coming… Equally, Skadden may be expected to mount a robust defense now that its client has been sued.” (PrestonByrne.com)

‍

Avichal Garg - Electric Capital

"The filing focuses on GRAMs as a security because Telegram Inc. controls TON and fundraised for its Messenger in addition” (Twitter)

‍

Dmitry Marinichev - Russian Internet Ombudsman

"The US Securities Commission cannot actually prevent the distribution of Telegram tokens, and its attempts to sue will lead to the “Streisand effect”: people who are far from the process will learn about the ICO” (rbc.ru)





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