Telegram VS SEC: who will win in the end?
Under this article, we propose to consider the chronology of events related to the Telegram cryptocurrency project -Telegram Open Network or TON, and also try to predict the future development of events and possible consequences of the conflict between Durov`s team and SEC.
So, let’s start with the basics, so as not to miss anything. For the first time, information about an ICO in the media appeared at the end of December 2017 from Anton Rosenberg, a former employee of VKontakte. Then he said that holding an ICO will help to raise money not only for the future development of TON, but also for supporting the operational activities of the messenger, which has been working absolutely free for 5 years now and it is not profitable. By the way, a little later, some experts calculated the annual expenses of Telegram, as well as the profit that was received from the sale of shares in VKontakte,but came to the conclusion that Durov’s money would really end soon and holding an ICO is almost the only way to continue to support messenger.
Then, white paper TON was merged into the network, in which the future platform was described in details. After that, information began to emerge that they held the first round of fundraising, during which it was possible to raise $ 850 million, but then another similar round was held and as a result, the total amount of funds raised amounted to $ 1.7 billion. Then an agreement was signed between investors, which regulated the launch of the platform. Then Pavel Durov reported to the US Securities and Exchange Commission (SEC) on attracting investments. According to the documents provided, two companies registered in the British Virgin Islands – Telegram Group Inc and TON Issuer Inc, which are managed by brothers Pavel and Nikolai Durov, were involved in raising funds. This information is important to remember. Telegram reported to the SEC on the raised funds. It should be noted, that both investment rounds were closed, that is, only certain investors had access to them. It was not about public sale.
Then the long process of developing a virtual machine began, which took almost 2 years. According to the signed agreement, Telegram is obliged to release the finished product by October 31 of this year, otherwise the team is obliged to return the attracted investments, provided that «force- majeure circumstances» don`t arise.
Shortly before the key date, information about the development phase began to merge into the network. In general, everything was well and Durov`s team managed to finish work on TON by October 31. Closed tests of the finished platform were already conducted to identify errors and eliminate them.
However, on October 11, Friday, the SEC on its website unexpectedly announces the adoption of «emergency measures and the receipt of an order to impose a time limit» in respect of two offshore companies associated with the Telegram Open Network (TON) ICO.
The regulator appealed to the federal district court in Manhattan with a statement accusing the company of violating the Law on Securities and wants to achieve an unlimited injunction on the distribution of Gram tokens and the return of illegally assigned funds with interest and a fine.
«We have said several times that issuers cannot escape the implementation of federal securities laws by simply calling their product cryptocurrency or a digital token» Stephen Paykin, co-head of SEC enforcement said. «Telegram wants to take advantage of the public offering, while not complying with established requirements».
Interestingly, what kind of public offer he is talking about if Telegram didn`t conduct a public fundraising?
Immediately after this statement, TON developers wrote to their investors that due to the lawsuit, the release of the project could be postponed. They also noted that they had been interacting with the regulator for a year and a half and didn`t understand such a step on the part of the SEC.
Even later, information appeared that the SEC in September contacted American investors and requested information that the project passed to them. The regulator found out that one of the Telegram investors was talking about his «A +» level development team and about the possibility of making a profit of 0x-50x. Two other investors said they were not told of any profit.
A couple of days later, two investors got in touch with the Russian Forbes and reported that people close to Durov were discussing a possible delay in launching the platform for half a year or a year.
«Durov’s team is confident that during this time they will be able to resolve all issues with the SEC» one of them said.
Yesterday, information appeared in the mass media that the company really offers investors to postpone the launching of the project until April 30, 2020, and to two groups separately. This time Telegram should be enough to resolve all differences with the SEC. The company doesn`t agree with the regulator’s allegations and will prove its position in court. Participants in the second round of fundraising must give an answer before October 23. If one group agrees and the other doesn`t, then there is a mechanism for changing the terms of the agreement, according to which a smaller amount of Gram will be distributed at the time of launch of the platform on October 30. If both groups are against the transfer, then the company will return to investors «approximately 77%» of the invested funds.
The hearing is scheduled for October 24. Then the final decision will be made.
BlockTV, referring to «sources inside Telegram» said that Telegram had problems with the Financial Crimes Enforcement Network (FinCEN). The regulator requires Telegram to introduce a complete identity for all Gram holders.
What became known about Gram from the SEC lawsuit?
• Telegram sold 2.3 billion coins in the first round and 639 million in the second. In both rounds, the team raised $ 850 million each. The token sale price was determined by the formula. Thus, in the first round, the token cost $ 0.37, in the second $ 1.33. The market price at the time of launch should be $ 3.62.
• For the first buyers, a «discount» system is provided. They will be able to buy the first coin for $ 0.10, after which the price will increase exponentially by one billionth of value until it reaches the market. We already wrote more about the «TON formula» in this article – https://journalcdiamondcoin.info/chto-budet-iz-sebya-predstavlyat-proekt-pavla-durova-ton/.
• It is said in the agreement that the issuer agrees to issue coins by October 31, 2019, otherwise investors will return their money minus expenses.
• Of all the funds raised, Telegram spent $ 218 million on the messenger and blockchain. In total, it is planned to spend $ 520 million. Moreover, the SEC focuses on the fact that Durov raised a lot more money than was actually required.
• Durov was personally involved in marketing. For example, he told one of the investors that the demand for the GRAM currency will be determined by its availability for 170 million wallets.
• Investors are sure to profit from the development of the ecosystem. Durov promised to make the Telegram wallet the most popular in the world.
• In January, one investor was promised a profit of 0X to 50X in the amount of the investment. As a result, this investor invested $ 27.5 million.
• Developers promised high liquidity of Gram tokens. The Durov team even made efforts to list the token on a number of cryptocurrency exchanges.
• The first customers were promised benefits due to the use of the TON ecosystem.
• And a number of interesting points.
Summing up all the information received, the SEC can make conclusion that Gram is a security, not a currency. But for the sale of a security, information must be disclosed, which Telegram didn`t do.
What information should have been disclosed?
According to the laws «On Securities» and «On the Exchange of Securities», the following information:
• Description of the property of the company.
• Description of the security offered.
• Information about company management.
• The financial situation of the company.
It should be noted, that a security is determined by using the Howie test. According to it, a transaction is a security if:
• It is committed to invest.
• The investor expects profit.
• The investment is in a joint venture.
• Profit depends on the actions of the person proposing the contract, or a third party.
Based on the information that the SEC received from investors, Gram is indeed a security.
What could be the consequences?
The opinions of various media and experts were divided. Some argue that Durov is not afraid of SEC decisions, others think that it is better not to quarrel with SEC, because it is one of the most respected regulators in the world and, at best, the company will lose the US market.
Durov in one of the Telegram updates wrote that while the team was on a business visit to the Valley, regulators made requests several times and tried to contact company representatives, but Telegram ignored them and continues to ignore them. This was reported by one of the Gram investors. I wonder how this information compares with the statement of the Durov`s team itself, according to which the company all the time cooperated with the regulator? According to the investor, the money collected may not be on the accounts of offshore companies, but, for example, in Dubai, where Durov moved in 2017. If so, then TON will not interfere with work, besides the legal consequences in the USA.
If the company follows this way and simply ignores the regulator, then this will primarily affect American investors. According to the lawsuit, there are 39 in total. They invested ¼ of the total amount of $ 424.5 million in the project. Theoretically, Durov could simply return the money to the Americans, however, as it is noted by two sources, he doesn`t want to do this. Moreover, investors don`t want this either. «Everyone wants to make money».
Durov can simply ignore the SEC, issue an update on the due date, in which the wallet will appear, and charge investors their cryptocurrency. But then, let them decide for themselves what to do with it. However, such a step is likely to put an end to the peaceful resolution of the problem with the SEC. In addition, in a last letter to investors, Durov confirmed that the launch of the platform will adversely affect the trial.
Durov has a great experience in ignoring the authorities, so this course of events is most discussed. An injunction would in no way limit Telegram to another world, but again, this will create problems for American investors.
What does the SEC require? Prohibition of the release of Gram and imposition of a fine. If it is possible to correctly resolve the conflict, then a ban is unlikely, but the fine is quite likely.
Therefore, it seems to us that the problems with the regulators are the very force-majeure circumstances, which are provided in the agreement. Therefore, Telegram will postpone the official launch of the platform for six months in case investors agree, and will not return money to them. But during this time it will solve all problems with the SEC. In addition, this version is proved by the last letter, which was sent to investors. Is is said in the letter, that Telegram will present them the new terms of the agreement. If more than half will agree to a postponement of the TON launch, then they will. If less than half, then a refund would be provided. Although from a legal point of view, the company is not obliged to return the money, because problems with the authorities are force majeure circumstances.
Of course, the attention of the cryptocurrency community is now geared to October 24th. Hearings will show the vector of development. In the meantime, we can only watch.
UPD: TON developers told the Manhattan District Court that they were ready to suspend all operations related to the Gram token. They asked not to introduce an official ban on the distribution of cryptocurrency, but in return, Telegram is ready to commit itself not to offer, sell or transfer cryptocurrency until the end of the proceedings.
It is especially should be noted, the fact that Durov hired the best US law firm to protect his interests. Skadden, Arps, Slate, Meagher & Flom are real «heavy artillery» in the American legal field. Forbes considers it the most influential Wall Street Company. This tells us that Durov is serious and ready to defend his interests in court.