U.S. SEC: Telegram token issuance was solely a fundraising method due to a lack of funds

The U.S. Securities and Exchange Commission (SEC) recently stated that the large-scale token sale initiated by the messaging software Telegram in 2018 was merely a fundraising method due to a shortage of funds on servers and related services.

The U.S. Securities and Exchange Commission (SEC) has expressed its core viewpoint for the first time in the latest documents regarding the Telegram Open Network (TON) allegedly violating U.S. securities laws: "Token sales are merely an alternative to equity financing."

Telegram Open Network

Telegram was jointly developed by Russian entrepreneur Pavel Durov and his brother Nikolai (a renowned computer scientist). In 2018, TON did not conduct an initial coin offering (ICO) due to regulatory concerns, but still raised nearly $1.7 billion in two private rounds, second only to EOS's $4 billion in history. The token is named Gram.

According to the document released last week, Telegram CEO Pavel Durov has been seeking ways to raise funds, acknowledging the need for funds to purchase equipment, considering equity sales, and subsequently adopting unconventional means (token issuance) for fundraising.

A report indicated that the U.S. Securities and Exchange Commission (SEC) sued the company last October, claiming that Gram tokens are unregistered securities, and demanded that Telegram cease the launch of the TON blockchain. The first hearing of this case will take place in February.

The SEC provided messages between Telegram CEO Pavel Durov and Vy Capital founder Alexander Tamas. The contents revealed that Durov needed funds to purchase servers and pay related expenses, and had considered traditional equity financing.

Concerned that such actions would affect the company's integrity, values, and corporate spirit, Durov ultimately decided against selling equity. However, he also did not wish to charge users or open up to advertisements, believing that doing so would hinder the company's ability to expand its user base and compete with its rivals.

Complete Bypass of SEC Before Token Issuance

The SEC emphasized that TON investors purchased Gram tokens not to become part of the validation nodes (TON operates on a proof-of-stake mechanism) but purely out of investment demand. The SEC pointed out:

Telegram did not inquire whether investors planned to become validation nodes on the TON network, nor did it contact regulatory authorities before token issuance.

In response, Durov stated that the company did not attempt to contact the SEC before the private sale. He explained:

At that time, Telegram was still in the process of "research and exploration." I didn't think it was necessary to contact the SEC because I thought it was still too early, and we were still unsure about what exactly to do.

Since then, Telegram has engaged in extensive communication with regulatory authorities. Since February 2018, Telegram has given three presentations, had nine phone calls, and exchanged numerous emails with SEC officials.

In response to the SEC's strong intervention, Telegram is actively working to distinguish its tokens from securities. As previously reported by ABM, the company stated under SEC regulatory pressure:

Telegram cannot guarantee widespread adoption or the realization of any applications, Gram tokens are not investment products, their value may decrease over time, and may even lose all value.

Related Reading

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• U.S. SEC's strong intervention, Telegram: Cannot guarantee the realization of any applications