The US Securities and Exchange Commission has sued Telegram, the encrypted instant messaging and voice app, alleging its $1.7bn token offering had broken federal securities laws.
The US securities regulator on Friday said it obtained a temporary restraining order against the messaging app and a subsidiary, TON Issuer Inc. Telegram had promised to begin distributing tokens to investors by October 31.
“Our emergency action today is intended to prevent Telegram from flooding the US markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, co-director of the SEC’s enforcement division, in a statement.
Markus Ra, a Telegram representative, and lawyers for the company did not immediately return requests for comment.
The lawsuit filed in federal court in New York said Telegram, which is owned by Russian entrepreneur Pavel Durov, had argued the “Gram” tokens it sold to investors in 2018 were currency, rather than securities.
The SEC dismissed the argument, claiming that Telegram had “led investors to expect that they could reap substantial profits” if they purchased tokens. “Telegram touted a readily available trading market for Grams,” the lawsuit said.
Silicon Valley investors including Benchmark and Kleiner Perkins Caufield & Byers had lined up behind the offering, which was widely viewed as the largest ICO to date.
Telegram had said it would use the proceeds to create a “blockchain network project” allowing developers to create new applications on the service
Similar to Facebook’s Libra token, Telegram envisioned that Grams would become a new way for people to make digital payments and money transfers.
The lawsuit against Telegram came as five companies pulled out of Facebook’s Libra project on Friday as it received intense scrutiny from lawmakers and regulators in the US and Europe.
Over just three months in early 2018, Telegram raised $1.7bn from the sale of 2.9bn Grams to just 171 investors, according to the SEC’s lawsuit. Some $424.5m was raised from 39 US-based investors, it said.
The action by the SEC is the latest example of an ongoing crackdown on alleged illegal securities offerings in the cryptocurrency industry.
In recent years, the regulator has taken an uncompromising view on token sales, dismissing arguments from sellers that federal laws governing share sales did not apply to them.
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labelling their product a cryptocurrency or a digital token,” said Steven Peikin, also a SEC enforcement co-director.
“Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public,” he added.
The SEC has sought to distinguish between cryptocurrencies designed for purchases and tokens where, in its view, the reality is closer to a capital raise.
Earlier this year, it issued letters to two companies that laid out the attributes of a token sale that did not qualify as a securities offering, including that the tokens could not be immediately resold for profit.