Telegram returns $1.2 Billion to Investors; Pays $18.5 million penalty to settle SEC charges

OMG! No matter how big your company, you know compliance is so much cheaper.

Just before Independence Day, the U.S. District Court for the Southern District of New York approved the Securities and Exchange Commission’s (SEC) settlement with Telegram Group Inc. and its wholly-owned subsidiary, TON Issuer Inc. The issues? Telegram’s unregistered offerings of digital tokens called “Grams.”

What kind of settlements did the SEC secure?

BIG $ettlements

According to the SEC, Telegram’s unregistered gram offerings violated federal securities laws. Without admitting or denying the charges, the defendants did agree to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty. Ouch!

Where was Telegram’s compliance?

Doing other things, while the SEC was paying attention to the lack of oversight.

On October 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 Commission sought to enjoy Telegram from delivering the Grams because it alleged they were securities (not cash) offered and sold in violation of federal securities laws registration requirements.

The Court issued a preliminary injunction on March 24, 2020, barring the delivery of Grams. Moreover, it found that the SEC was very likely going to be able to prove that Telegram’s sales were part of a larger scheme to distribute the Grams to the secondary public market unlawfully.

A fine line between difference between innovation and violation

According to Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit, The SEC welcomes the participation of “new and innovative businesses in our capital markets, but they cannot do so in violation of the registration requirements of the federal securities laws.

“This settlement,” she says, “requires Telegram to return funds to investors, imposes a significant penalty, and requires Telegram to give notice of future digital offerings.”

Lara Shalov Mehraban, Associate Regional Director of the New York Regional Office, adds that the SEC’s “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…and provide significant relief to investors.”

The defendants consented to the 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. As a result of that judgment, the companies will disgorge $1,224,000,000 in ill-gotten gains from the Grams sales, with credit for the amounts Telegram pays back to initial purchasers of Grams. The judgment also orders Telegram Group Inc. to pay a civil penalty of $18,500,000. Moreover, for the next three years, Telegram must give notice to the SEC staff before participating in the issuance of any digital assets.

Where was compliance?

Not looped in, perhaps. This was no small lack of supervision. In this instance, of bad apples acting really badly, there is no question that compliance is cheaper. And that’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and compliant records archiving specifically designed for the financial services community. Be smart. Be covered.Let’s talk.