SEC: Cash-Strapped Telegram Launched 2018 Token Sale to Pay for Servers

Telegram launched a 2018 token sale because it was "Short on cash" to pay for servers, the U.S. Securities and Exchange Commission said.

The claim, made in the regulator's latest document dump in its ongoing securities case against Telegram, shows for the first time the core of the SEC's argument: that the token sale was merely a substitute for equity financing.

The documents released Thursday show Telegram CEO Pavel Durov had been looking for ways to raise money, acknowledged the need to pay for equipment and considered an equity sale before going the more unconventional route.

The SEC sued the company in October of last year, claiming the tokens, known as grams, were unregistered securities and demanded Telegram halt the launch of the TON blockchain.

Until recently, Telegram was funded by Durov himself, according to the documents submitted to the U.S. District Court for the Southern District of New York."In 2017, Durov therefore needed 'cash' to buy Messenger's servers and pay for related services. He considered selling traditional voting equity but decided against it, 'concerned that [it] would affect the company's integrity its values, and [its] ethos,'" the regulator said in a motion for summary judgment.

"At this point Telegram needs cash to keep buying more servers, but I can start considering such ideas after we solve our cash requirements," he said.

According to the SEC, Telegram's financial services specialist Shyam Parekh said during a call with Anchorage, a U.S.-based crypto custodian Telegram wanted to partner with: "Because the Telegram team is so stretched. They have been partners of Telegram for 6 months and helping testing from day one."

Telegram employee Shyam Parekh, a former Morgan Stanley banker, told an investor they "Had the right to 72,835,916.68 Grams and that 'the Fund has clear title to such securities,' 'will be entitled to receive... Grams when they are issued,' and that 'the securities are not pledged,'" the SEC said.

The SEC also said Telegram never contacted the regulator before the token offering started and only filed for an exemption from registration requirements under Regulation D after the agency's staff learned about the offering and contacted the company.

The following month, Telegram's lawyer from the law firm of Skadden, Arps emailed the SEC and a Regulation D filing for the first sale round was submitted on Feb 13, 2018.However, after that, Telegram communicated with the regulator extensively, the company said in its own motion for summary judgment.