
SEC halts Telegram's $1.7B token offering - jmsflknr
https://www.sec.gov/news/press-release/2019-212
======
H8crilA
The SEC does not block such things because it thinks those are overpriced. The
SEC does not care about the price. The SEC did not, and should not have
blocked WeWork, to take an example.

What the SEC requires is a registration of the security with the form S-1/F-1.
Nothing more, nothing less. If the paperwork is complete they will greenlight
this offering.

I don't know why wouldn't they just register. Cut a very tiny percentage of
the amount, pay someone to do the paperwork, you can go ahead. But do it with
cards on the table, as the securities registration form requires (it's quite
extensive and requires, for example, a clear statement of all risks involved
in the offering).

~~~
wmf
The time and cost to do an S-1 is massive and it can reveal embarrassing facts
that lower the company's valuation, as in the case of WeWork.

~~~
edraferi
Which is, of course, exactly what you want. These rules exist because
charlatans bilked a lot of consumers out of a lot of money. The financial
industry will do this consistently because the incentives are obvious. There
has to be some external force slowing down the fraud.

~~~
thefounder
>> These rules exist because charlatans bilked a lot of consumers out of a lot
of money

The rules are made by the "deep state" to serve the establishment.

On a more serious note these rules/regulations/processes also deny access to
capital to startups. It's not really that easy or cheap to go public on a
stock exchange. People should do their due diligence before to invest in
stocks anyway, right?

~~~
indymike
How exactly does one do due diligence without a substantial amount of
disclosure to study?

------
aey
This isn’t a block on another telegram’s sale, but on their launch. Telegram
filed an exemption for their original sale, and have been compliant with the
SEC.

[https://www.sec.gov/Archives/edgar/data/1729650/000095017218...](https://www.sec.gov/Archives/edgar/data/1729650/000095017218000060/xslFormDX01/primary_doc.xml)

What this action threatens is the SAFT model. It’s not clear what steps TG
needs to take to disassociate themselves from the launch such that TON is
decentralized and no longer a security. Or if they need to file a reg-a or s-1
before launch.

[edit for clarity]

~~~
dang
The title states flatly that they're halting the offering. Is that inaccurate?
What's the distinction here?

If the title is misleading, the practice on HN is to replace it with a better
(i.e. accurate and neutral) one, as described at
[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html).

~~~
Obi_Juan_Kenobi
This isn't a regulated security, so there's no 'official' name for what
they're doing.

Basically, there was a private offering previously where large amounts were
sold to selected parties. What is being blocked is the public 'offering' where
these tokens can be publicly traded.

The SEC is saying that Telegram Group is clearly offering a security, and thus
is subject to regulation. Indeed, what Telegram is doing is significantly
different from 'classic' crypto issuance a la Bitcoin. There was no company or
legal entity responsible for Bitcoin, let alone one that could control the
network while profiting off of it. They have similar opportunities for the
sort of financial malfeasance that the SEC is designed to mitigate.

Personally, I find it extremely difficult to argue with the SEC's position.

I strongly support cryptocurrencies, namely Bitcoin, but also recognize that
these pre-mine coins are entirely different on many levels. They are
hilariously vulnerable to abuse, only just rising beyond the level of an
outright scam.

~~~
neom
If it's fungible and negotiable, it is a security, if it is a security, it is
regulated. If you try to move something that is fungible and negotiable, it is
offered, therefore an offering, therefore regulated.

~~~
alasdair_
>If it's fungible and negotiable, it is a security, if it is a security, it is
regulated.

By this definition, Magic: the Gathering cards and beanie babies fall under
SEC jurisdiction.

~~~
amanaplanacanal
They are not fungible.

~~~
alasdair_
One mint condition card is exactly the same as any other. This is how
marketplaces eork.

------
zkid18
> According to the SEC’s complaint, Telegram Group Inc. and its wholly-owned
> subsidiary TON Issuer Inc. began raising capital in January 2018 to finance
> the companies’ business, including the development of their own blockchain,
> the “Telegram Open Network” or “TON Blockchain,” as well as the mobile
> messaging application Telegram Messenger. Defendants sold approximately 2.9
> billion digital tokens called “Grams” at discounted prices to 171 initial
> purchasers worldwide, including more than 1 billion Grams to 39 U.S.
> purchasers. Telegram promised to deliver the Grams to the initial purchasers
> upon the launch of its blockchain by no later than October 31, 2019, at
> which time the purchasers and Telegram will be able to sell billions of
> Grams into U.S. markets. The complaint alleges that defendants failed to
> register their offers and sales of Grams, which are securities, in violation
> of the registration provisions of the Securities Act of 1933.

The most interesting thing is that at one time I carefully read the prospectus
and noticed that everything was perfectly done there correctly: tokens are
issued in addition to certain securities that are issued strictly according to
the current legislation, that is, the tokens themselves were NOT sold ... And
It was not some former Russian lawyer who wrote the deal, but DLA Piper, one
of the top 5 of approximately US legal concerns.

~~~
elchupanebre
> tokens are issued in addition to certain securities

Could you please provide a pointer to registration paperwork of those
securities? It must exist if they are "issued strictly according to the
current legislation". Thanks.

------
ttul
This is great. Telegram's token offering was a gigantic scam. Does anyone
really believe their tokens are worth $1.7B anymore?

~~~
ainar-g
Which is honestly a shame, because Telegram the messenger is freaking amazing.
Probably the best instant messaging experience of my whole life. If only Pavel
“Pashka” Durov decided to fund the company with something less scammy. Like a
premium version with VPN and maybe some additional features like even bigger
file uploads. I would be among the first clients.

~~~
m12k
It's the only IM app that does notifications right. I get a message and
'unread messages' notifications pop up on both my computers and my phone - the
moment I click to focus the app on one of them, the notifications on the other
computer and phone go away. With other apps it seems there's always a risk
that a notification marker is just a leftover from before that they forgot to
clear - that's never the case with Telegram.

~~~
ainar-g
Don't forget about _drafts_ being synced between devices. I remember the first
time I've noticed that: “Wait, didn't I write this on my phone? Why is this in
my desktop client?”

~~~
lucb1e
That's actually the only feature that has a bug (the rest works flawlessly):
when I connect my phone to the internet after I started writing a message,
even if I have the chat open and I'm actively typing and internet just
connects in the background, then it'll literally erase what I typed so far
with no warning or anything. It'll see that the server has no draft or an
empty draft or something, and it'll just get rid of my message so far and
there is no way of getting it back.

Well, to be fair, there is also this other minor bug about encryption being
off by default and only available on a few clients and not synchronizing
between different encryption-supporting clients...

~~~
eitland
> Well, to be fair, there is also this other minor bug about encryption being
> off by default and only available on a few clients and not synchronizing
> between different encryption-supporting clients...

Here we go again.

Encryption is not off by default.

It is just not E2E encrypted, i.e. it works just like any bank, Gmail etc etc
etc.

(except, based on what I've heard Telegram, unlike any mainstream bank, put
the extra effort in to keep encryption keys not only on separate servers but
in a different jurisdiction than your messages.)

Edit:

Now if we could stop spreading misinformation we could discuss one thing that
might be the real flaw in Telegrams model and which I would consider trying to
move to a different messenger over - _if they fixed it while delivering the
same experience_ :

The one huge issue I have with Telegram is the funding model.

Whatsapp more or less nailed this early on:

\- low, reasonable price that still made them plenty profit

\- possibility to pay for others (kids, friends etc)

Give me the same offer as Whatsapp once gave me:

I pay them, they deliver my messages, provide quality clients on all
platforms, doesn't snoop, doesn't spam etc, and I'll download the beta today.

Provide a legally binding agreement that makes their company worthless and
publishes the code under Apache or another _liberal_ [0] license somehow if
they sell out or becomes sleazy and I'll be walking around pondering how to
help them.

[0]: yep, I want it to be as simple as possible to make a good chunk of cash
from transporting my messages securely and elegantly from my device to other
peoples devices as well as the other way.

~~~
lucb1e
E(nd to end)ncryption is off by default, that's not an opinion. Gmail (afaik)
doesn't have that at all, so saying it's off in Gmail by default is weird.
It's not the same thing. (It's like saying a car's radio is off by default
versus a bicycle's (non-existent) radio.)

Anyway, I guess that's just semantics. We both understand what is the case,
whether you like calling it a default setting or "just not encrypted". I do
fully agree that Telegram is shady because it's just a money sink, and that
WhatsApp had a great profit model (pre-Facebook of course). I did the math
once (though that was just messages, not media) and a euro a year (times a few
hundred million users, back then) was plenty to support a chat system with
only a few developers as employees. If Telegram would adopt the same profit
model, that would be great.

~~~
eitland
Here is what you wrote:

> encryption being off by default and only available on a few clients and not
> synchronizing between different encryption-supporting clients

This more than implies that Telegram sends messages in plaintext.

Which isn't true.

In your reply now you prove that you are aware of this with this little
sentence at the start:

> E(nd to end)ncryption is off by default, that's not an opinion.

E2E encryption is of course better than other forms of encryption but writing
in a way that makes people think that something sends data as plaintext
instead of encrypted is not acceptable at all IMO.

Edit:

You are also misquoting me:

> Anyway, I guess that's just semantics. We both understand what is the case,
> whether you like calling it a default setting or "just not encrypted"

That's not what I call it.

I call it encrypted.

The secret chats option I call end-to-end encrypted.

~~~
lucb1e
Alright, you got me, I said encrypted instead of end to end encrypted. I did
not think it was necessary to specify that level of detail, given that
everything is encrypted-to-the-server these days. I see what you mean, there
is indeed a difference, but it feels to me like you're trying to trap me on
words for the sole reason of being to say that you're right and I'm wrong
about something.

~~~
eitland
> I see what you mean, there is indeed a difference, but it feels to me like
> you're trying to trap me on words for no reason.

I'm honest, my contact details is in also in my profile like you have in
yours, and I'm not trying to trap you on technicalities of the language, but I
think we should be very precise about what we mean.

Either communication is cleartext or it is encrypted.

If it is encrypted it is either end-to-end encrypted or it is not.

A number of people keeps repeating this idea that Telegram is not encrypted
and while you obviously know the difference we shouldn't continue confusing
those who don't.

It would be a shame if someone went with something even less secure because I
keep trash-talking Whatsapp and others keep trash-talking Telegram. (I
fortunately don't hear many trash-talking Signal, but it doesn't have enough
marketshare here to matter yet.)

------
RcouF1uZ4gsC
Before, a lot of token offerings could skate under the radar. That day is
over, and the SEC is cracking down. Anyone offering anything close to a token
would be well served talking to a lawyer experienced in securities law.

~~~
snagglegaggle
I've always been kind of confused as to how the SEC has jurisdiction on this.
The Telegram tokens don't appear to be a stake in the company and rather seem
to be similar to a PayPal account balance. Companies can effectively issue
money via coupons or redeemable certificates. In the case of coupons there is
some law about requiring them to have a marked cash value.

EDIT: Though it will prompt more downvotes -- explain them when downvoting,
thanks.

~~~
wahern
You can Google the legal arguments, but suffice it to say that the legislation
creating the SEC is old and vague, and anyone, including the SEC, who says
that their characterization of tokens is _absolutely_ correct is misleading
you.

Also, the SEC is notorious for their intransigence even after multiple courts
and even the Supreme Court have repeatedly rejected their legal
interpretations. One example is their definition of insider trader--their
definition of insider trading is far more expansive than courts will accept.
When you take insider trading courses at a corporation, you're typically being
taught the SEC definition, not the legal definition accepted by Federal
courts.

Normally companies are risk adverse and aren't keen to piss off the SEC, so
they play along. Nobody wants the SEC snooping around as there are invariably
minor infractions to be found, especially at a large company. But sometimes,
as with Telegram, companies will push back heavily when they want to
aggressively pursue some profit opportunity. This doesn't mean these companies
are willfully ignoring the law or aggressively pushing the envelope, as is
often the case in other areas of regulatory law, e.g. Uber. Rather they're
just not willing to placate the SEC. Their legal counsel might otherwise
sincerely believe that the company's actions are _well_ _within_ the bounds of
the actual law.

~~~
qwerty456127
All SEC does is creating jobs for lawyers, fake sense of safety for amateur
investors and a vulnerability in every business so it can be exploited once
that becomes a profitable idea. Did you know everything is securities
fraud?[1]

[1]
[https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...](https://www.bloomberg.com/opinion/articles/2019-06-26/everything-
everywhere-is-securities-fraud)]

~~~
wahern
In the SEC's defense, they're tiny and woefully underfunded. That's why they
always come out swinging hard, and are so intransigent. They want
interpretations that make it easy for them to penalize and convict. Big
companies have enough legal resources, as well as enough pull in Washington,
to wipe the floor with the SEC unless the law is crystal clear in the SEC's
favor. The SEC is hardly the only regulatory agency that wants easier
convictions, or is fearful of lobbyist pushback, but it's a perpetual issue
with the SEC, and the situation is peculiarly and qualitatively unique.

If the SEC gives a small investor an inch, the big financial houses will
extend that into a parsec. And those companies are constantly watching for
those opportunities. So, yeah, the SEC isn't shy about picking a fight with
the little guys because they only pick fights they think they can win,
preferably outside court; the consequences of losing a fight are huge. This
strategy isn't unique to the SEC, but it's uniquely consequential to their
authority and effectiveness in general. It's an unfair situation all around,
but at the end of the day responsibility falls on Congress.

In any event, my point was that if the situation seems confusing, it almost
certainly is a confusing situation without any obvious answers.

~~~
gamblor956
That explains how they won those cases against small fry like Madoff and
Martha Stewart.

~~~
wahern
Those were exceptionally (almost laughably) easy cases and, IMO, make my
point. The hard ones were the myriad cases of ratings and other deceitfulness
that led up to the 2008 financial crisis. Only a _single_ top banker was
successfully criminally prosecuted, and the list of settlements was infamously
underwhelming:
[https://en.wikipedia.org/wiki/List_of_major_SEC_enforcement_...](https://en.wikipedia.org/wiki/List_of_major_SEC_enforcement_actions_\(2009%E2%80%9312\))

For further reading see [https://www.propublica.org/article/the-rise-of-
corporate-imp...](https://www.propublica.org/article/the-rise-of-corporate-
impunity) and [https://www.theatlantic.com/magazine/archive/2015/09/how-
wal...](https://www.theatlantic.com/magazine/archive/2015/09/how-wall-streets-
bankers-stayed-out-of-jail/399368/)

------
PunchTornado
> “We have repeatedly stated that issuers cannot avoid the federal securities
> laws just by labeling their product a cryptocurrency or a digital token,”
> 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.”

I agree.

------
treelovinhippie
Since there was never a public token sale (as it was all raised privately)
they should have just done a debt/equity raise. What was the point in doing an
ICO?

Though like all of these private token sales, it's a great way for crypto
whales to multiply their imaginary wealth without having to exit to fiat and
pay taxes.

~~~
shanecoin
To take advantage of the ICO hype. Telegram could never have raised $1.7B in
different, more traditional medium.

~~~
treelovinhippie
I dunno, someone like Softbank would have happily thrown that their way.

~~~
elchupanebre
It's unlikely that one Ponzi scheme will invest into another.

------
Shank
I'm really interested in how this plays out. It seems to me like the SEC's
argument is that Grams aren't a currency because you cannot currently buy or
sell goods with Grams. But the currency hasn't launched yet, and that's the
whole point of the injunction I suppose: to stop the currency from launching
before it becomes a currency. It also seems to me like this is an effort
that's easily circumvented. Wouldn't it be trivial to offer something (such as
some fancy badge on a Telegram account) in exchange for Grams, thus giving the
currency value?

Are there any mechanics at play that could legitimately stop Telegram from
launching the blockchain and distributing the tokens to users who aren't from
the US?

~~~
shkkmo
It doesn't matter whether it is a "currency" or not.

> The test is whether the scheme involves an investment of money in a common
> enterprise with profits to come solely from the efforts of others. If that
> test be satisfied, it is immaterial whether the enterprise is speculative or
> non-speculative or whether there is a sale of property with or without
> intrinsic value. [0]

Thus if the ICO's are sold with the expectation that profiting from the
purchase of those token depends entirely on Telegram completing work on their
network and integrating that network with their app, then the Howey test seems
to apply.

Telegram currently restricts the sale of the coin (via contracts) and heavily
marketed the value coming from "200 millions of Telegram users will get a TON
wallet making it the world’s most adopted cryptocurrency".

I don't really see how you could see this a not being a security under the
Howey test.

[0]
[https://en.wikipedia.org/wiki/SEC_v._W._J._Howey_Co](https://en.wikipedia.org/wiki/SEC_v._W._J._Howey_Co).

------
emilfihlman
Does Telegram have assets in the USA to stop or otherwise punish them? I don't
see how the SEC could otherwise do anything about it.

~~~
RcouF1uZ4gsC
The USA, especially in the area of financial regulations has a very, very long
reach.

~~~
emilfihlman
That's very true, I'm just wondering what buttons will they push to do that
here given Telegram's background.

~~~
AzzieElbab
Pressure Apple and Google to remove the app from their stores?

~~~
notsrg
At least on Android, Telegram is available via Fdroid:
[https://f-droid.org/en/packages/org.telegram.messenger/](https://f-droid.org/en/packages/org.telegram.messenger/)

~~~
bdcravens
What percentage of Android users, or to be generous, Telegram users, are
running Fdroid?

~~~
imsesaok
it's not a huge investment, and does not cost any money; market share really
doesn't matter here when you can get in easily. you also can download the app
on their website without installing their store app.

also keep in mind that telegram definitely can distribute their app on their
website, like they do with desktop apps.

------
phront
Maybe its a silly question but can Telegram just give back $1B to all american
participants of the project and continue the process?

~~~
JumpCrisscross
> _can Telegram just give back $1B to all american participants of the project
> and continue the process?_

That’s called disgorgement of proceeds. There are also usually fines and
agreements not to break the rules again.

In this case, however, it would be tough to ensure no future buyer of these
securities is American. (To say nothing of Telegram having raised U.S. dollars
and so falling under U.S. jurisdiction.)

------
democracy
Wow, why would anyone care (I am not even talking about exchanging their cash
for that crap) about one messenger's virtual currency? I am personally looking
forward for an opportunity to invest in Candy Crash Coins and Sim City Dollars
and you wanna know why? Because BLOCKCHAIN!

~~~
newscracker
There’s still a big market for companies or solutions that make cross border
transactions cheap and quick. Conventional banks are far behind and quite
expensive. Even companies like Transferwise, InstaRem, Xoom, etc., aren’t the
best in all the markets they work in (and they aren’t available everywhere
either). Government regulations on cross border transactions matter, but that
alone cannot be the reason why current conventional solutions have been so bad
for a long time.

~~~
democracy
Ha, the cost of an abstract "cross border transaction" is zero. The problems
start when you want to cash in and out. At this stage welcome to the real
world and appreciate the barriers Western Union/etc need to go through to
comply with local AML/anti-terrorists/whatever laws. The "cryptocurrency"
technology does not help in this case, that's the one of the crypto-shills
agendas:

1\. Cross border payments

2\. Bank the unbanked 3rd world

3\. Means to help for the hyperinflated currencies.

4\. Store of value

All of them are completely delusional and only work for people who never had
to make those payments, know 3rd world from the discovery channel and learn
about hyperinflation on CNN.

------
CosmicShadow
Kik is fighting the SEC because of their token Kin, is this a similar issue?

~~~
lacker
Yeah it’s a very similar situation. TLDR, they both started selling the token
long before it actually existed, the token being totally controlled by one
company, based on promises that they would build stuff later, to mass market
US investors. All those are red flags for SEC action.

~~~
nullc
SEC didn't care when ethereum did exactly that-- created 72 million tokens out
of thin air and sold 80% of them to the general public long before any system
existed to make use of them.

~~~
lacker
That's true, or at least the SEC doesn't seem likely to go after Ethereum.
It's hard to say for sure what exactly the difference is.

It seems like the SEC is intentionally not being clear about what they find
acceptable and what they find unacceptable. I don't know whether this is
because they are just slow about things, or whether they want to keep their
options open because why not, or what.

It would be nice to have crisp, clear rules about how to create a new token
that is considered a commodity in the US.

~~~
nullc
Or because there is potentially a conflict of interests?

It's not too hard to imagine that SEC staffers have an interest in some of the
things they're not going after and don't have an interest in things that they
are.

In particular, it sure seems to me that surprises in SEC enforcement seem
oddly correlated with the offerings that I know were really liberal in handing
out premined coins to 'advisors'.

------
angel_j
Do token offering. Raise Millions. Deal with the SEC later.

~~~
wmf
If TON doesn't launch by October 31st they have to return the money and then
Telegram will run out of money and go out of business. They only have 20 days
to figure it out.

~~~
ledak
Telegram will not run out of money, Durov has enough money to support it for
years.

~~~
skinnymuch
Some one was saying they spent $200M+ of it already. If that’s true, he can’t
afford that easily. He sold his VK stake for $300M 6 years ago.

Forbes is saying he’s worth $2.7B, but not saying how. Forbes has been wrong
multiple times before on net worth. I’m guessing they are including his
Telegram stake and the Telegram crypto value.

------
HashThis
The big risk to governments isn't a generic cryptocurrency token. The big risk
is a platform used by a huge base of people PUSHING them to be used in the
real world. This is the trigger to cause mass adoption.

That is the real risk. That is why stopping them is an emergency action.

~~~
hinkley
This is a big risk to the US government as well and it's really alarming to me
how many american blockchain enthusiasts don't get that if they really did get
their way, the dollar would tank and take every community with it.

Part of the strength of the dollar is the volume of trade that is done in it,
including much of the world's energy. All that money moving around increases
demand.

I've heard it said that in most revolutions, the middle class enlist the lower
class to defeat the upper class for them, and then they insert themselves as
the new upper class. This 'revolution' seems no different. A bunch of upwardly
mobile people fantasizing about becoming feudal lords after they disrupt the
entire system.

Things are not going so badly that chaos would be better.

I gotta say, technologists as a whole are reasonably nice people, but one of
the reasons I have hobbies is that there are nicer people out there than us,
and lots of them. We should _not_ be in charge of the world. This is an area
where we are wrong and I hope for everyone's sake that we fail.

------
CryptoPunk
The SEC registration requirements are a blatant violation of the freedom to
contract.

An individual should decide for themselves whether they will invest in a
venture, not have that decision made for them by politicians and opinionated
busybodies.

~~~
theamk
That's how we ended up with Great Depression. We don't want this to happen
again.

~~~
CryptoPunk
The Great Depression had nothing to do with people being free to buy stocks.
It was a classic bubble being burst, followed by counter-productive government
measures to prevent prices/wages from deflating (which they needed to do as
the money supply contracted):

[https://www.eurekalert.org/pub_releases/2009-08/uoc--
hps0819...](https://www.eurekalert.org/pub_releases/2009-08/uoc--
hps081909.php)

[https://www.wsj.com/articles/SB123353276749137485](https://www.wsj.com/articles/SB123353276749137485)

