Telegram Token Sale Is Likely A Victim of Rising ICO Scrutiny

(Bloomberg) -- Telegram Group Inc., an encrypted messaging app, has reportedly scrapped plans to issue digital tokens in a public sale after raising a whopping $1.7 billion privately.

One argument is that the company, founded by self-exiled Russian Pavel Durov, doesn’t need additional funds. But the move would come as securities officials are increasing scrutiny on the digital token market, and a public sale would have made the company more susceptible to regulatory risk, according to Spencer Bogart, partner at Blockchain Capital. The Wall Street Journal earlier reported Telegram’s plans to cancel the sale, citing an unnamed person familiar with the matter.

“From a regulatory perspective, I think a public sale is considerably riskier for Telegram than a private sale,” Bogart wrote in an email. “Considering the amounts raised by Telegram via private sale, there’s really no need to incur the additional risk of a public sale.”

The U.S. Securities and Exchange Commission and other regulators have warned that tokens sold in ICOs are really securities in disguise and have already cracked down on a handful of projects. While many companies doing ICOs say tokens are made to be used in their networks and don’t represent an investment vehicle or a stake in the firms, regulators say in most cases investors are hoping to sell their tokens as prices go up.

Telegram, which has become a popular platform for ICO teams and investors to communicate, held two rounds of private sales in February and March, raising $850 million in each round from fewer than 200 investors. The British Virgin Islands-registered firm filed documentation to the SEC known as Form Ds in compliance with Rule 506(c), which is an exemption for private placements, and the minimum investment in the March sale was $1 million.

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Telegram officials didn’t immediately respond to a request for comment.

ICOs, which have raised more than $7 billion so far this year, have been hailed by crypto enthusiasts as a way to democratize venture investments. In that sense, Telegram’s fund raiser goes against what ICOs were meant to achieve, Erik Voorhees, founder and chief executive officer of cryptocurrency exchange ShapeShift, said in a tweet. “The SEC has created an environment where only the rich (aka “accredited investors”) are able to get access to financial deals. The plebeians must stick to the lottery,” Voorhees said.

From Telegram’s perspective, it was a smart move, said Gregory Xethalis, senior counsel at law firm Chapman and Cutler LLP.

“While certain industry participants may be chagrined that only accredited investors had an opportunity to participate, from the issuer’s perspective, a private sale is far less costly and risky and it still managed to far exceed initial expectations,” Xethalis said.

©2018 Bloomberg L.P.

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