Messaging startup Telegram Group has agreed to return more than $1.2 billion to investors to settle allegations that it illegally sold digital tokens to raise money for a blockchain project.
The settlement came three months after a court granted the U.S. Securities and Exchange Commission’s request for an injunction barring Telegram from distributing the “Gram” tokens it had pre-sold to 200 private investors including Russian billionaire Roman Abramovich and venture capital firm Sequoia Capital.
The SEC had sued Telegram in October 2019, claiming the Grams were securities and that Telegram had violated securities laws by selling them without registration statements informing the public about its business operations, financial condition, risk factors, or management.
As part of the settlement, Telegram also agreed to pay a civil penalty of $18.5 million.
“New and innovative businesses are welcome to participate in our capital markets but they cannot do so in violation of the registration requirements of the federal securities laws,” Kristina Littman, chief of the SEC enforcement division’s cyber unit, said in a news release.
Telegram raised about $1.7 billion for its Telegram Open Network (TON) from sales of approximately 2.9 billion Grams. The second phase of the offering was due to start no later than Oct. 31, with Telegram delivering the tokens to purchasers, who would then be able to resell them in the public markets.
But with its emergency enforcement action, the SEC was able to block Telegram from “delivering Grams to any persons, or taking any other steps to effect any unregistered offer or sale of Grams.”
The tokens qualified as securities, the SEC argued, because “the initial purchasers and subsequent investors expect to profit from Telegram’s work: the development of a TON ‘ecosystem,’ integration with Messenger, and implementation of the new TON blockchain.”
In May, Telegram announced it would no longer be developing TON.
“Our emergency action protected retail investors from Telegram’s attempt to flood the markets with securities sold in an unregistered offering without providing full disclosures concerning their project,” said Lara Shalov Mehraban, associate regional director of the SEC’s New York Regional Office.