SEC: Cash-Strapped Telegram Launched 2018 Token Sale to Pay for Servers

Telegram launched a 2018 token sale as a result of it was “brief on money” to pay for servers, the U.S. Securities and Change Fee (SEC) mentioned.

The declare, made within the regulator’s newest doc dump in its ongoing securities case in opposition to Telegram, exhibits for the primary time the core of the SEC’s argument: that the token sale was merely an alternative to fairness financing.

On the time of the sale, Telegram framed it as financing for a next-generation blockchain that might be sooner and extra versatile than its predecessors. The paperwork launched Thursday present Telegram CEO Pavel Durov had been in search of methods to lift cash, acknowledged the necessity to pay for gear and regarded an fairness sale earlier than going the extra unconventional route. 

The providing went on to lift $1.7 billion in early 2018. The SEC sued the corporate in October of final yr, claiming the tokens, generally known as grams, had been unregistered securities and demanded Telegram halt the launch of the TON blockchain. The primary listening to within the case is scheduled for subsequent month.

Till lately, Telegram was funded by Durov himself, in accordance with the paperwork submitted to the U.S. District Courtroom for the Southern District of New York.

“In 2017, Durov due to this fact wanted ‘money’ to purchase Messenger’s servers and pay for associated providers. He thought-about promoting conventional voting fairness however determined in opposition to it, ‘involved that [it] would have an effect on the corporate’s integrity its values, and [its] ethos,’” the regulator mentioned in a movement for abstract judgment. “Nor did Telegram want to begin charging customers or promoting adverts, believing that doing so would hamper its capability to broaden its person base and sustain with rivals.”

The SEC offered message change logs between Durov and Alexander Tamas, founding father of Vy Capital and beforehand a accomplice at DST Capital, a stakeholder in Russian social community Vkontakte, based by Durov. 

On August 14, 2017, Tamas provided Durov the chance to purchase $25 million value of shares in an entity whose identify is redacted from the doc. Durov responded that the time was not proper. 

“At this level Telegram wants money to maintain shopping for extra servers, however I can get thinking about such concepts after we clear up our money necessities,” he mentioned.

In response, Tamas urged he contemplate fundraising. Then Durov advised Tamas he had determined to “abandon plans for VCs … until someone throws some insane provide our means.” An “insane provide” can be $500 million for 10 p.c of Telegram or $1 billion for 20 p.c. 

On Jan. 16, 2018, Durov emailed an undisclosed particular person at funding financial institution Credit score Suisse saying that Telegram had been considering elevating fairness however then determined to go together with a cryptocurrency plan, the paperwork present.

To make certain, regardless of the preliminary motive, after the sale Telegram contributed sources to constructing TON and launched code for the blockchain in September. Traders acquired hyperlinks to the important thing generator to generate their pockets for the longer term grams. Telegram additionally needed to get assist from its unofficial accomplice, TON Labs, the entity helmed by the TON buyers and dealing on instruments for TON builders. 

In response to the SEC, Telegram’s monetary providers specialist Shyam Parekh mentioned throughout a name with Anchorage, a U.S.-based crypto custodian Telegram wished to accomplice with: “As a result of the Telegram crew is so stretched (TON Labs has extra engineers than Telegram). They’ve been companions of Telegram for six months and serving to testing from day one.”

The SEC additionally mentioned Telegram staff thought-about grams securities and used conventional capital market phrases to clarify the logic of the providing. 

Telegram worker Shyam Parekh, a former Morgan Stanley banker, advised an investor they “had the suitable to 72,835,916.68 Grams and that ‘the Fund has clear title to such securities,’ ‘will probably be entitled to obtain… Grams when they’re issued,’ and that ‘the securities are usually not pledged,’” the SEC mentioned.

The TON buyers themselves thought-about grams securities and purchased them to not use on the TON blockchain as validators (TON is a proof-of-stake community) however purely as an funding, the SEC argued. 

“Parekh analogized the staking of Grams to be chosen as a TON Blockchain validator to inventory lending,” the company wrote, including that Telegram didn’t ask the buyers in the event that they deliberate to behave as validators on the community. 

The SEC additionally mentioned Telegram by no means contacted the regulator earlier than the token providing began and solely filed for an exemption from registration necessities beneath Regulation D after the company’s employees realized concerning the providing and contacted the corporate. 

Throughout a deposition carried out by SEC lawyer Jorge Tenreiro on Jan. 7 of this yr, Durov confirmed the corporate didn’t attempt to contact the SEC earlier than the non-public placement of grams began. Telegram was nonetheless doing “analysis and exploratory work” at the moment, he mentioned.

“I do not consider we reached out to the Securities and Change Fee at that time, as we thought it was too early resulting from the truth that we did not know particularly what we might be doing,” Durov mentioned. He additionally confirmed Telegram hadn’t contacted the SEC by the point he signed the primary buy settlement for grams. 

In response to the SEC, the regulator realized concerning the providing on Jan. 8, 2018, and some weeks later tried to attach with Telegram’s authorized counsel. The next month, Telegram’s lawyer from the regulation agency of Skadden, Arps emailed the SEC and a Regulation D submitting for the primary sale spherical was submitted on Feb 13, 2018. 

Nevertheless, after that, Telegram communicated with the regulator extensively, the corporate mentioned in its personal movement for abstract judgment. In response to the submitting, since Feb. 6, 2018, Telegram engaged in three in-person shows for the SEC employees, 9 telephone calls and a number of e mail exchanges. The corporate additionally voluntarily produced paperwork to the SEC. 

Telegram maintained in its movement that the tokens are usually not securities. 

“Grams is not going to entitle purchasers to any earnings, any dividends, or any pursuits in Telegram … nor do they resemble inventory or another type of fairness,” the corporate mentioned.