BVI-domiciled and Dubai-based Telegram raised more than US$1.7 billion of investor funds within three months from January 2018. Telegram Group Inc. and its wholly owned subsidiary TON Issuer Inc. sold approximately 2.9 billion digital tokens called ‘grams’ at discounted prices to 171 initial purchasers worldwide. More than 1 billion grams were sold to 39 US purchasers, including high-profile Silicon Valley-based venture capital firms.

The SEC complaint alleges that Telegram failed to register the sale of the tokens as securities.

The company said it raised the funds to finance its business and develop its own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger.

It promised to deliver the tokens to initial purchasers at the launch of its blockchain but no later than 31 Oct. 2019.

The SEC action intends to stop the accredited, initial purchasers from receiving grams to prevent them from reselling the tokens in the public US market.

“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement in a press release. “We allege that the defendants have failed to provide investors with information regarding grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require.”

The SEC’s complaint, filed on 11 Oct. in federal district court in Manhattan, charges Telegram Group Inc. and TON Issuer Inc. with violating the registration provisions of the Securities Act, and seeks emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.

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

Telegram, which is owned by Russian entrepreneur Pavel Durov, believes its tokens should be treated as currency, rather than securities, and envisions that grams will be used to transfer funds and make digital payments.

However, the SEC claims that Telegram had “led investors to expect that they could reap substantial profits” if they purchased tokens. “Telegram touted a readily available trading market for Grams,” the complaint stated.

The SEC clarified earlier this year that tokens will be treated as securities, if they can be immediately resold for profit.