The Securities and Exchange Commission (SEC) filed a proposed judgment on Thursday in the Southern District of New York asking the court to order Telegram to pay back $1.2 billion of its $1.7 billion initial coin offering (ICO) and a civil penalty of $18.5 million.
The proposed judgment enjoins defendants from violating Section 5 of the Securities Act of 1933; by selling a security and other related means unless there is a registration statement. Additionally, in compliance with the Securities Exchange Act of 1934, for the next three years defendants must give the SEC a 45 day notice before they participate in “an issuance of ‘cryptocurrencies,’ ‘digital coins,’ ‘digital tokens,’ or any similar digital asset issued or transferred using distributed ledger technology”; they do not need to get prior approval or consent beyond what is required. Telegram must disgorge $1,224,000,000; this is offset by $1,193,400,000 as a termination amount as defined in the Purchase Agreements for Grams, which means that this is the amount it will pay back to investors from the original contracts and $30,600,000 as additional termination amounts to pay parties within three years of the final judgment if they do not take the immediate payout. Telegram is also subject to a civil penalty of $18.5 million under the proposed agreement. The SEC notes that if after this judgment there is any false or misleading information or materials to the SEC, Telegram could be subject to another civil penalty, which Telegram cannot challenge.
The proposed judgment notes that Telegram did not admit any wrongdoing and the right to appeal this judgment has been waived. The preliminary injunction expires if the judgment is approved. The agreement notes that Telegram agreed to the $18.5 million civil penalty in a June 11 agreement. The SEC will send the penalty payment to the Treasury and it will be treated as “penalties paid to the government for all purposes.”
Pavel Durov, founder of
Telegram stated, “Regrettably, we were unable to launch the TON platform by our
deadline date due to the preliminary injunction ordered by the Court, and thus
had to return the remaining funds to purchasers under our contractual
agreements. Since we saw limited value in pursuing the court case further,
we welcomed the opportunity to resolve it without admitting or denying our
Durov continued, “Today’s proposed settlement reconfirms our commitment to repay the remaining funds to purchasers under the Purchase Agreements. We’ve already repaid more than 1.2bn to the purchasers either directly or in the form of loans.”
In January the SEC filed an emergency motion to order Telegram to disclose how the $1.7 billion it raised in its ICO was spent. Later that month, both parties filed motions for summary judgment; the SEC argued that Telegram raised funds through an unregistered securities offering through the sale of its Gram tokens and Telegram countered that Grams is not a security. In March, the court granted SEC an injunction against Telegram. Lastly, Telegram announced it would shut down its blockchain operation and Gram cryptocurrency after the court’s injunction and its continued litigation with the SEC.
This proposal could potentially end a disagreement that has gone on since October 2019.
Telegram is represented by Skadden, Arps, Slate, Meagher & Flom LLP.