Telegram Should Have Done an STO to Avoid SEC Scrutiny
News broke this weekend that Telegram -- a popular messaging app for those that are privacy-minded -- had its Initial Coin Offering canceled by the SEC.
In a statement, the SEC Division of Enforcement co-director Stephanie Avakian said the action is “intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold.”
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labelling their product a cryptocurrency or a digital token,” added Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Telegram had already raised $1.7 billion in two private token sale rounds of Gram, the actual token, via TON, its eponymous network, held in February and March in 2018. These rounds were only open to accredited investors, in order to comply with SEC regulation. Although Telegram hoped to one day sell its token to the public, it decided to keep the sale private as to not attract SEC scrutiny and because it had already met its fundraising targets.
Telegram had filed a Form D with the SEC in March 2018 listing the amount it had raised, and also noting that the sale was only opened to accredited investors.
Why the SEC is Scrutinizing Telegram
If Telegram had really kept the sale only open to accredited investors, the SEC would not have much of a case against Telegram.
But there was a leak. Earlier this year Gram Asia, named after the token Telegram was selling on TON, announced it was selling part of its holdings -- at triple the price -- to anyone that wanted it.
This was in direct contravention to the purchasing agreement that buyers entered when they bought Gram as the contract forbade the following:
“ENTER INTO ANY swap or other AGREEMENT THAT TRANSFERS, in whole or in part, ANY OF THE ECONOMIC CONSEQUENCES OF OWNERSHIP OF THE INVESTMENT CONTRACT represented by this Purchase Agreement or any Tokens.”
However, the SEC didn't buy the narrative that Gram Asia acted without authorization and continued to push with its order to halt the sale.
Telegram and the SEC are set to meet in court on October 24.
Telegram Should have Done an STO
Initial Coin Offerings are far from the only way to raise capital via the Blockchain. STOs, or Security Token Offerings, are effectively next-generation ICOs: they have all the characteristics of an ICO but play ball with regulators in order to bring legitimacy to their offering. In fact, many financial hubs, both up-and-coming and established have a specific framework that allows for STOs.
There is also the option of going the equity crowdfunding route, which offers all the characteristics of a sale of equity to the public but does so under a regulated framework. In fact, crowdfunding portal SeedInvest is in the process of moving towards the tokenization of the equity of the companies it has on its portal (all of this has been greenlit by FINRA in the US).
All of these have ceilings that range from $5 million to $100 million per year. But it's doubtful that Telegram would have a burn rate that would require anything more per year, thus it could be done in rounds. While it would take some time to raise the capital, all of this would be done in a way that wouldn't cause conflict with regulators. In addition, funds raised could likely be met by VC firms which would be impressed by the dollar figures raised.
More legal pathways might be around the corner. In September, a group of lawmakers from the US Congress sent a letter to the Securities and Exchange Commission Chairman Jay Clayton, calling for regulatory clarity regarding cryptocurrencies. Earlier in the year, Congressmen Warren Davidson had introduced the Token Taxonomy Act which sought to create a sandbox that would allow tokens to be exempted from SEC regulation while also creating mechanisms to protect investors.
Davidson described the bill as a way to make "the U.S. is the best destination for Blockchain technology.”
Telegram isn't Toxic
There are obvious parallels here to KIK, a Telegram rival that also raised money via an ICO, and also earned the ire of the SEC. Unlike many of the companies that chose to pursue ICOs, which turned out to be scams, both KIK and Telegram had real products with a respectable userbase: KIK had 5.31 million monthly active users in the US in June 2019 while Telegram had 3.44.
These were not vaporware products, so why not pursue traditional fundraising pathways like VCs? Surely, with these kinds of metrics VCs would have more of a chance of getting their 10x return.
KIK, for its part, had a fairly toxic image and was often synonymous with child pornography and online predators. In 2016, a state law enforcement official quoted anonymously by The New York Times said that KIK was the "problem app of the moment".
In contrast, Telegram just had an enthusiastic userbase that was largely made up of Blockchain and cryptocurrency enthusiasts. Telegram might have thought that doing an ICO would be 'on brand' and anything else would have been rejected by their userbase. But its 2019; there are ways now to both embrace Blockchain as well as raise funds legally. To do otherwise is just plain ill-advised and rings of hubris.