A brief history of the Telegram ICO & SEC lawsuit so far (June 2020)

In writing about Block.One, the largest ICO in history at $4 Billion (2018), one’s eye naturally sees Telegram next on the list, as the second largest ICO ever. Telegram raised $1.7B, also in 2018.

Although it was not quite Telegram (see section 4 for more on Telegram, a popular messaging app) that raised money in the ICO per se, it was their subsidiary project, the Telegram Open Network (TON). TON was supposed to be a better distributed blockchain network than Bitcoin and Ethereum, because it had much better scalability, among other features. The cryptocurrency for the TON project was supposed to be Gram.

Technically an ICO never happened. No investor was ever able to login to their exchange and trade Gram. The capital raises in 2018 were pre-sales to private investors.

Court documents from a case brought by the U.S. SEC show a number of big name investors invested through these pre-sale offerings in 2018, including Kleiner Perkins, Sequoia, Fortress, Ribbit Capital, DRW Holdings, Redpoint, and Draper Dragon.

The SEC sued Telegram for selling unregistered securities in October 2019. Telegram maintained they should be exempt from registration under SEC Regulation D, because they were pre-selling shares that weren’t allowed to be resold in a secondary market before the actual public ICO of Gram. The SEC brought evidence that there were in fact commission-based secondary sales.

In February, a Federal judge ruled against Telegram, saying the SEC had a right to block its Gram offering until the case is resolved, because the pre-sale and the Gram offering were just 2 parts in the same scheme.

After several delays and missing an April 31 deadline for the Gram offering, Telegram offered investors either a 72% refund immediately, or a 110% payback on April 31, 2021. The latter in effect asked for a 1-year loan.

Soon after, in May, citing the regulatory uncertainty, Telegram retracted the loan offer for US investors, and asked that they exit the investment and accept the stipulated 72% refund. The loan option remains for international investors.

On May 12, Telegram announced it was shutting down the TON project.

Summary Quotes

Adrian Henni wrote a good article in East-West Digital News that summarized thoughts around the project well.

Gram pre-sale investor Pavel Cherkashin:

“Investors’ funds were basically spent on the development of Telegram, which is a conflict of interests.”

Anton Rozenberg, Telegram executive on the ICO:

“Everything in this ICO seemed magic: Telegram managed to raise on a virtual project as much or even more than the company itself could have been valued at — with almost no commitments to investors and no equity loss.”

“The white paper was beautiful and looked smart, there was a team, there was plenty of money. It seemed there was plenty of time, too. But soon after the ICO, it appeared that not much time was actually left and that everything was more complicated.”

Rozenberg, on the non-readiness of the TON network itself:

“While the software is far from being ideal even in presentation and documentation, there’s no way it could be ready to issue tokens on an exchange,” he said in a recent interview. “After launch, the project could collapse both technically and economically in the absence of any demand for such tokens.”

Conclusion

Company governance, transaction structure, regulatory requirements, and complex multi-lateral project strategy (like Block.One) — these reflect many of the skepticisms that were always there with ICOs and crypto generally. The fact that so many large venture players are tied up in this is notable, because it shows they all had crossed the bridge in terms of these risks.

One wonders why all these transactions can’t simply take place outside the U.S. legally. The answer for many investors is probably that they want the protection of U.S. Courts.

In this case, Telegram is a smashing success as an App company, having grown it’s equity value, but investors will have a very hard time suing to turn their ICO pre-sale documents into equity shares. It’s a failure as a blockchain network and cryptocurrency.

Section 4: About Telegram, the Messaging App

Telegram has more name recognition than Block.One to those outside crypto circles, because it has a consumer mobile app with over 400 million monthly users worldwide, and 1.5 million new signups a day.

It is a messaging app that has earned its popularity due to a number of functional and security features that go beyond the likes of say, WhatsApp.

Here are a few of the standout features, as highlighted by Jazli Aziz on Twitter:

• Instant View links inside the App, with advertising from the page removed
• Edit sent messages
• Take group polls
• One-to-many Channels, with a number of Admin tools
• Ability to communicate based on username, not phone number
• Multiple devices and multiple accounts
• Organize chats into folders
• Scheduled messages
• Save messages
• Pin messages to the top of the group
• Good stickers and animated emojis