Telegram cancels its much-hyped initial coin offering

via Verge

Secure messaging service Telegram is canceling its initial coin offering (ICO), an anonymous source told The Wall Street Journal today, and it won’t be opening up its digital coins for public sale. The cancellation is a blow to public investors who hoped to get in on the ground floor of one of the largest cryptocurrency investment opportunities in history, with an estimated $1.7 billion already raised.

Another source cited in the Journal partially attributed the shutdown to increasingly tight regulations that the Securities and Exchange Commission, Commodity Futures Trading Commission, and other lawmakers have proposed since Telegram initially began planning an ICO.

Much has changed in the regulatory environment since January when rumors swirled that Telegram was contemplating an ICO. In February, SEC chairman Jay Clayton had harsh words for ICOs that dodged registering with the SEC. “Many ICOs are being conducted illegally,” Clayton said, testifying before Congress. “Their promoters and other participants are not following our security laws.” In March, reports surfaced that the SEC sent subpoenas to dozens of cryptocurrency companies including tech companies that had launched ICOs.

It could also be the case that Telegram has simply raised enough money in private sales that it no longer needed an ICO. Telegram’s first presale in February raised $850 million from 81 investors; in March, the company said it had successfully raised another $850 million from 94 investors in a second round. In total, Telegram raked in $1.7 billion from fewer than 200 private investors.

The money is supposedly going toward Telegram’s Open Network project that will continue to fund its messaging platform and develop new features. The network would be built with a public ledger that would eventually serve as an alternative to Visa or Mastercard, Telegram promised.


another perspective via Recode:

Ever since Telegram raised $1.7 billion from private investors, people close to the deal have expected the company to no longer need to reach regular, mom-and-pop investors in order to fund a massive cryptocurrency project.

The messaging company Telegram has now officially decided to scrap the public part of the Telegram ICO, according to the Wall Street Journal. It’s not surprising, but it is quite the about-face for a company that was planning to raise hundreds of millions of dollars through a public initial coin offering that was meant to democratize the way blockchain projects are funded.

One reason why this makes sense:

  • Telegram doesn’t need the money, and likely doesn’t want the scrutiny. Telegram’s CEO, Pavel Durov, only initially secured $850 million from a global base of investors early in 2018 — from some established venture capital firms like Benchmark and Sequoia Capital. But then Telegram collected a second tranche of $850 million in what has to be one of the quickest fundraising events in tech. The company doesn’t need much more than $1.7 billion to actually build and market the Telegram Open Network: The whole company only plans to spend $400 million over the next three years, according to the white paper.
  • So why risk more regulatory scrutiny by opening the ICO to the public? It remains unclear how the Securities and Exchange Commisssion will regulate these initial coin offerings, and that uncertainty to this day still freezes some venture capitalists from participating in ICOs. Some Telegram investors have acknowledged in recent months that a public sale could encourage more oversight given that now it wouldn’t just be wealthy venture capitalists who possibly could be hurt by a token sale gone wrong.

But here’s one big reason why this doesn’t make sense:

  • Telegram, like other social messaging companies, claims to be on a mission to connect the world. And initial coin offerings as a concept claim to offer more and more everyday people the chance to financially support and profit off a good idea. That’s not happening here: Only people who qualify as “accredited investors” — the wealthy, the well-connected institutions — are eligible to buy into the Telegram ICO at a discount.

This could be a foreboding sign for ICOs — and could limit the amount that they upend the venture capital system. If public sales become too risky, then it will still be the elite who are able to cash in on the success of startups, blockchain-related or otherwise.


And one more via Bloomberg:

Telegram Token Sale Is Likely a Victim of Rising ICO Scrutiny

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©, which is an exemption for private placements, and the minimum investment in the March sale was $1 million.

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.


Telegram’s billion-dollar ICO has become a mess

Telegram’s ICO was supposed to be a record-breaker to develop a platform that brings the decentralized internet to life. Instead, it has become a mess with the tightly controlled fundraising process in disarray as early backers sell their tokens for handsome returns.

The company recently canceled the public sale piece of its ICO, the Wall Street Journal reported this week, after it raised $1.7 billion from private sale investors, according to SEC filings. But the issues date back further.

Telegram’s grand vision is to build the TON (Telegram Open Network), a blockchain-based platform that extends its messaging app, which counts 200 million active users, into a range of services that include payments, file storage, censorship-proof browsing and decentralized apps hosted on the platform. According to the original whitepaper, the plan was to raise $1.2 billion using both invite-only private investors and an open sale to the public.

Telegram later extended the raise to $1.7 billion before it canceled the public sale altogether. That’s almost certainly because it had already raised enough money to develop TON without the risk of running into the SEC’s ongoing ICO probe by soliciting money from the public.

The result is that the ordinary people can’t buy Telegram’s Gram crypto token until it is released on exchanges. There’s currently no timeline for that. But, with massive demand for the messaging app and deep discounts for early backers, a secondary market for buying and selling tokens early has emerged — with huge returns already realized by some.

One source said an early investor who acquired a tranche of tokens at a price of $0.37 is actively seeking to sell for $1.30 — potentially a 3.5-fold increase for a token that hasn’t left the gate yet. TechCrunch understands many others deals have been closed at different rates but other middlemen are sliding in to profit, too. A number of ‘brokerages’ have moved in on the opportunity to connect sellers and buyers for a fee.

That’s just some of the examples of unofficial deals that are flowing as early backers who got Gram tokens cash in on demand, which has only increased following the cancellation of the public sale. Added to that, discounts of up to 50 percent on the token price have made it easy to return a big multiple.

Given the cooling off of the price of bitcoin, Ethereum and other cryptocurrencies this year, a three-fold return with no risk is not to be sniffed at.

Another source told TechCrunch that Telegram is aware of the unofficial sales but, since they do not violate any laws — because ICOs are not regulated — there is nothing that it can do but watch. The issue with early sales is that the market can influence, or even set, the price of a token through unofficial deals which could complicate listing it on exchanges or setting a post-ICO price.

Added to that, the fact that Telegram isn’t in control of the flow of capital at this early stage doesn’t look good.

The Telegram ICO has already raised considerably more than any other project to date — the nearest being Filecoin’s $250 million-plus ICO — but it has not set a shining example.

Looking beyond the messy sales process, the project has been heavily criticized for ambiguity. Pantera Capital’s Charles Noyes called it “opportunistic” with a white paper that is “essentially a wishlist of things they want to have, and how it will work assuming that their wishlist doesn’t crash and burn.” MIT Technology Review called it “bold but short on ideas,” while others have pointed out that much of the technical theory laid out in the document is recycled from other projects.

Telegram’s immediate challenges go beyond the ICO at this point. The Russian government has gone after the messaging app through crude censorship campaign that knocked out swathes of IP addresses — potentially as many as 19 million — in order to prevent Telegram evading its crackdown. That hammer-headed approach also knocked out services like Twitch, Slack, Soundcloud, Viber, Spotify, Fifa, Nintendo in the process.

TechCrunch contacted Telegram CEO Pavel Durov for comment but we had not heard back at the time of writing.


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