SEC shoots down Telegram’s TON blockchain

Modern Consensus

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05/12/2020

 

The demise of the Telegram Open Network (TON) means the days of crypto projects raising significant amounts of money by pre-selling tokens have come and gone, well-known cryptocurrency lawyer Stephen Palley told Modern Consensus.

Telegram CEO Pavel Durov announced on May 12 that his messaging platform’s active involvement with TON is over—using a blog post to lambast the U.S. judge who effectively stopped the project from going ahead.

The company was in a long-running and bitter legal dispute with the Securities and Exchange Commission (SEC) over the $1.7 billion it raised by pre-selling 2.9 billion gram tokens to 175 rich investors, some of them American. The agency has described that sale as an unregistered securities offering, and thus unlawful.

Palley, a partner at Anderson Kill who co-chairs the law firm’s blockchain and virtual currency group, said there was always a good chance that Telegram’s battle with the SEC was going to end in tears.

Nonetheless, Palley believes it could have huge ramifications for crypto projects that have raised money using a Simple Agreement for Future Tokens (SAFT)—especially if they are based in the U.S.

More problems ahead

In a telephone interview about Telegram’s predicament, Palley told Modern Consensus: “It’s no surprise the fact that they hired an expensive, very good law firm, and that it was no protection against the fact that the SEC viewed the token as a security—and that’s apparently what a federal judge thought as well.”

He predicted that Telegram’s decision to throw in the towel doesn’t bode well for the likes of Kik and XRP, both significant projects in litigation, as TON’s case “has some suggestive precedential value that a judge will certainly look at.”

Palley has urged U.S. companies that have used SAFTs to assess whether this is the best course of action. “I think it’s going to create problems for other people in the space,” he said. “This is what happens when you push against a regulator thinking money and lawyers will buy your way out.”

Under the SAFT model, a company pre-sells tokens to a group of wealthy ....

Click to read the full interview

 

The demise of the Telegram Open Network (TON) means the days of crypto projects raising significant amounts of money by pre-selling tokens have come and gone, well-known cryptocurrency lawyer Stephen Palley told Modern Consensus.

Telegram CEO Pavel Durov announced on May 12 that his messaging platform’s active involvement with TON is over—using a blog post to lambast the U.S. judge who effectively stopped the project from going ahead.

The company was in a long-running and bitter legal dispute with the Securities and Exchange Commission (SEC) over the $1.7 billion it raised by pre-selling 2.9 billion gram tokens to 175 rich investors, some of them American. The agency has described that sale as an unregistered securities offering, and thus unlawful.

Palley, a partner at Anderson Kill who co-chairs the law firm’s blockchain and virtual currency group, said there was always a good chance that Telegram’s battle with the SEC was going to end in tears.

Nonetheless, Palley believes it could have huge ramifications for crypto projects that have raised money using a Simple Agreement for Future Tokens (SAFT)—especially if they are based in the U.S.

More problems ahead

In a telephone interview about Telegram’s predicament, Palley told Modern Consensus: “It’s no surprise the fact that they hired an expensive, very good law firm, and that it was no protection against the fact that the SEC viewed the token as a security—and that’s apparently what a federal judge thought as well.”

He predicted that Telegram’s decision to throw in the towel doesn’t bode well for the likes of Kik and XRP, both significant projects in litigation, as TON’s case “has some suggestive precedential value that a judge will certainly look at.”

Palley has urged U.S. companies that have used SAFTs to assess whether this is the best course of action. “I think it’s going to create problems for other people in the space,” he said. “This is what happens when you push against a regulator thinking money and lawyers will buy your way out.”

Under the SAFT model, a company pre-sells tokens to a group of wealthy, or accredited investors, calling that a securities sale. The idea is that when the blockchain launches, those investors will resell them to the general public. But, because those tokens could then be used on that blockchain, they would no longer be securities bought and sold as an investment. That in turn means they could then be resold to retail investors without an initial public offering (IPO).

A blow to U.S. investors?

Telegram’s admission of defeat comes after a U.S. court ruled in March that the SEC had “shown a substantial likelihood of success” in proving the company had distributed unregistered securities. The judge also concluded that the issuance of Gram tokens to investors in the U.S. and worldwide should be delayed. That order caused Durov to throw in the towel.

Related People

- Blockchain and Virtual Currency Attorney | Anderson Kill P.C.
Partner
Washington, DC

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