On January 2, the Securities and Exchange Commission (SEC) filed an emergency letter motion to compel Telegram to disclose information and provide documents regarding how funds raised in its initial coin offering (ICO), an alleged $1.7 billion, were spent. Telegram is mostly known for its messaging platform but has more recently ventured into blockchain-powered cryptocurrency. The SEC filed a complaint in October stating that the $1.7 billion raised was an unregistered securities sale. The new filing requests that Telegram release testimony and documents relating to the amounts, sources, and use of funds. The emergency letter motion was filed in the New York Southern District Court. Telegram is represented by Skadden, Arps, Slate, Meagher & Flom.
Telegram raised approximately $1.7 billion by selling Gram, its cryptocurrency tokens, to investors between January and March 2018. The SEC claimed that this was an unregistered securities offering. Telegram is “refusing to disclose the bank records concerning how they spent the $1.7 billion they raised from investors in the past two years and to answer questions about the disposition of investor funds.” The SEC stated that Telegram has previously refused to provide this financial information to the agency and to its investors, as a result, it did not provide a statutory prospectus. The emergency motion stated, “Telegram’s bank records are also relevant to whether Telegram paid commissions to purchasers who were buying Grams to resell to other investors (as appears to be the case based on documents we have reviewed), which could render them statutory underwriters (such that Telegram’s offering would not qualify for an exemption).”
Telegram’s offering in 2018 was intended to help its plan to develop a “Telegram Open Network” blockchain for Grams and the possibility to have widespread adoption of Grams through the growth and expansion of its messaging app. It was also revealed that “[i]n a ‘Primer’ Telegram circulated to prospective investors, Telegram stated that ‘[a] total spending of about $620 million to support continuing organic user growth should allow Telegram to reach one billion active users by January 1, 2022.’” Telegram suggested as of the end of January 2019 it spent about $218 million for general corporate purposes. Telegram has repeatedly refused to provide additional financial information and documentation.
The SEC alleged that Telegram’s Grams were “part of the ‘investment contract’ (and, therefore, securities) offered and sold in 2018 and that Telegram failed to register their offer and sale and failed to make clear that any resale of the Grams to the public would similarly be subject to registration or a valid exemption.” On the contrary, “Telegram claims that only the Purchase Agreements, but not the Grams which are the subject of the Purchase Agreement are securities and that they were sold only to ‘accredited investors,’ thus exempting their offer and sale from registration.” These conflicting perspectives shed light on Telegram’s refusal to disclose, in part because it does not think that it should have to disclose because it does not view the items as securities. Due to the lack of documentation and uncertainty, “Telegram either raised more than the $1.7 billion for which it claimed an exemption, or it did not raise $1.7 billion as of March 29, 2018, and the later funds may have been raised through underwriters.”
Additionally, “the ongoing large deposits Telegram received from certain Purchase Agreement investors after the claimed end of the Offering suggests that those entities had entered into Purchase Agreements with Telegram with a view to reselling those securities to others, and during the latter half of 2018 were raising funds from others on behalf of Telegram.” Proof of this action would strengthen the SEC’s argument against Telegram. This information will determine if investors had an expectation of profits when purchasing Grams.