Telegram Group and its wholly owned subsidiary TON Issuer have agreed to return more than $1.2 billion in ill-gotten gains to investors and pay an $18.5 million civil penalty to resolve Securities and Exchange Commission charges that Telegram’s unregistered offering of digital tokens called “Grams” violated federal securities laws.

The settlement was announced Friday. “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, in a press release. “The remedies we obtained provide significant relief to investors and protect retail investors from future illegal offerings by Telegram.”

On Oct. 11, 2019, the SEC filed a complaint against Telegram, alleging that the company “had raised capital to finance its business by selling approximately 2.9 billion Grams to 171 initial purchasers worldwide.” The SEC sought to prohibit Telegram from delivering the Grams, which the SEC alleged had been offered and sold in violation of the registraton requirements of the federal securities laws.

Telegram argued in its response complaint, filed Oct. 16, 2019, that the SEC’s position was “unreasonable and wholly unnecessary.” It asked the court to deny the SEC’s motion to enforce a subpoena. Further, Telegram argued the token itself was not a security, while the token purchase offering for the Gram was a security.

Telegram lost its argument. On March 24, 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction barring the delivery of Grams and finding the SEC had shown a substantial likelihood of proving Telegram’s sales were part of a larger scheme to unlawfully distribute the Grams to the secondary public market. In a June 25 final judgment, the SEC obtained court approval of the settlements.

Without admitting nor denying the allegations in the SEC’s complaint, Telegram and TON Issuer consented to entry of a final judgment enjoining them from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. In addition to the civil penalty and return funds to investors, Telegram must also, for the next three years, give 45-day notice to SEC staff before participating in the issuance of any digital assets.

Telegram response

Telegram Founder Pavel Durov first announced on May 12 that it was ending the launch of its new blockchain platform—TON—citing the U.S. court proceedings. “This court decision implies that other countries don’t have the sovereignty to decide what is good and what is bad for their own citizens,” Durov wrote. “If the United States suddenly decided to ban coffee and demanded coffee shops in Italy be closed because some American might go there—we doubt anyone would agree. And yet, despite that, we have made the difficult decision not to proceed with TON.”

On June 25, in an updated statement responding to the final judgement, Durov said, “Since we saw limited value in pursuing the court case further, we welcomed the opportunity to resolve it without admitting or denying our liability. … We look forward to continuing to pursue our other projects and avenues for innovation, and we hope the regulatory environment for blockchain technology in the United States becomes more favorable for others in the future.”