SEC Stops $1.7 Billion Unregistered Digital Offering

The SEC has filed an emergency action and obtained a temporary restraining order against two offshore firms conducting an alleged unregistered digital token offering in the US and overseas that raised more than $1.7 billion of investor funds.

The order is intended to prevent the US markets from being flooded with digital tokens the regulator says were unlawfully sold.

According to the SEC’s complaint, Telegram Group Inc., and its subsidiary TON Issuer Inc., began raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, known as the “Telegram Open Network” or “TON Blockchain,” in addition to a mobile messaging application called Telegram Messenger.

To raise the capital, the SEC said Telegram sold digital asset securities called “Grams” to 171 investors for proceeds of approximately $1.7 billion, about $424.5 million of which came from the US market. However, the SEC said the firm did so without filing a registration statement for the Grams as they are required to do under the Securities Act of 1933.

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“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, said in a release. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”

The SEC said Grams are considered securities because the initial purchasers and subsequent investors expect to profit from Telegram’s development of a TON “ecosystem,” integration with Messenger, and implementation of the new TON Blockchain. It also said that Grams are not a currency because, among other things, there are not any products or services that can be purchased with Grams.

“Rather, there is an expectation on the part of investors that they will profit if Telegram builds out the functionalities it has promised,” said the complaint.

The SEC also said that if Grams were to hit the public markets, it would be “virtually impossible” to unwind the offering because many purchasers’ identities would be “shrouded in secrecy.”

The complaint, filed in federal district court in Manhattan, charges Telegram and TON Issuer with violating the registration provisions of the Securities Act, and seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.