Pavel Durov eager for battle with SEC

The beginning of the year turned out to be hot for Pavel Durov and his team; in early January, the founder of Telegram was questioned for a total of more than 16 hours.
21.01.2020
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And on January 15, SEC and Telegram made mutual petitions, asking the court to consider the case in an expedited manner. This means that the denouement is close, and both participants in the process believe in their victory. It's time to sort out the positions of the parties, because the outcome of this business largely depends on whether cryptocurrencies get a second life.

Let us briefly recall the essence of the dispute. The main contentious issue is how to consider the cryptocurrency of Durov Gram. The US Securities and Exchange Commission (SEC) is trying to prove that these are securities, and Telegram, attracting investors, violated US laws because it did not register the placement. Telegram objects that it did not violate anything, since Gram is not a security, but a currency.

It is not easy to judge whose positions in court are stronger. SEC in the last round of proceedings presented a correspondence of Telegram employees, which, according to the regulator, proves that they themselves considered Gram a security. And also - evidence that the TON team knew about the Gram's circulation in the secondary market and even paid funds and companies commissions for finding new buyers for the cryptocurrency that was not yet released.

Telegram continues to insist that it is impossible to consider Gram a security, because unlike stocks, it does not give any rights to shares in either Telegram or the TON blockchain platform, and Pavel Durov paid remuneration to the funds not for reselling Gram, but for finding new ones investors to implement the project.

Now it all depends on whose concept the court accepts and whether he considers the SEC evidence sufficient for the prosecution. If the court approves the application for expedited proceedings, we will know the answer soon enough.

What did Durov say?

The Bell found the evidence of Pavel Durov in Dubai - at least the most complete version of all available. But quite a few important details have been extinct from it, probably for reasons of confidentiality. However, thanks to these materials, we still learned a lot about the placement of TON. Details about this - read on our website. Here is a brief retelling.

Why did Durov need money. Until 2018, Durov, according to him, had invested in Telegram what he had earned from the “timely” sale of VKontakte, and did not see any big problems in this. “I'm not one of those who need real estate ...” - he explained during interrogation. But since 2013, Telegram only demanded money, but did not bring returns. The TON blockchain platform seemed to Durov the most successful option for monetizing the messenger.

What did $ 1.7 billion go for - how many Durov attracted from investors to develop the TON blockchain platform. On TON and at the same time on Telegram, Durov spent about $ 218 million of $ 1.7 billion. He does not share the costs of both projects - after all, both TON and Telegram are developed by the same people and work on the same servers and equipment. More than 40% of the spent, or about $ 87 million, was spent on equipment, and since October last year, the team spent another $ 10 million on servers and related costs.

Why sell Gram to a wide circle of investors. In order for the blockchain to work stably after launch, it needs more than 20 validators - participants of the platform who assure transactions. Only a participant with at least 100 thousand Gram can become a validator in TON, who will also take part in a special auction. The Telegram team itself does not plan to become validators.

Why did Telegram pay the funds. Durov admitted that Telegram paid remuneration to the funds - Da Vinci and Gem Capital (both funds are TON investors), but not as underwriters, but as companies that helped Telegram look for new investors (Durov calls it finders fees).

Who works at Telegram. About 30 people, most of whom are programmers. Almost all developers work simultaneously on the development of the messenger and on the blockchain.
 
When will TON be launched. Durov says that the blockchain was completely ready for launch on time, that is, by the beginning of October - and it would have been launched if it had not been for the intervention of the SEC. Now the project team is focused on testing it by the end of April, and in parallel is developing additional services (although it did not assume such obligations to investors). Among these services are: TON VPN, TON Storage and TON Proxy.

Telegram's position in court

Telegram reveals its arguments in the memorandum, which is attached to the materials of the year. According to the company, the SEC in this matter exceeds its authority: another regulator, the US Commodity Futures Trading Commission (CFTC), must regulate Gram as a currency. Telegram insists that Gram should be recognized as a cryptocurrency, not a security, because it gives neither the right to dividends, nor a share in any company.

Moreover, its price after the release will depend solely on the situation on the market, and not on the efforts of the Telegram team, which, according to the terms of placement, may generally stop working on the project after its launch. “This is the case with the architect: he constructs a skyscraper, but cannot know what will happen to him after that,” an example is given in the documents. Telegram does not deny that investors rely on profits from the purchase of Gram after the launch of the blockchain. But it will depend only on the desire of many people to buy or sell Gram, and not on the efforts of the development team.

On the Telegram arm are earlier decisions of the SEC itself, according to Durov’s lawyers. The Securities Commission has already recognized that the Gram counterparts - bitcoin and ether - are not securities. Telegram also insists that it did not conduct a public ICO, and all investors in the project are experienced and sophisticated people and funds that have undergone rigorous screening. Telegram warned all investors that it did not consider Gram a security, and did not register placement in the SEC - and this is a regulatory risk that they should be aware of.

It also follows from the memorandum and testimony of Pavel Durov that the Telegram team knew about the existence of the Gram secondary market, but in every possible way condemned this practice, and also demanded from its investors to sign an agreement that the resale of currency before the blockchain was launched is prohibited.

SEC Position

Excerpts from the correspondence of Telegram employees between themselves and with investors are published as evidence in the SEC memorandum. The regulator believes that the company and its founder from the very beginning regarded ICOs as a substitute for selling shares in the company, and Gram marketing and sales were indistinguishable from marketing and sales of securities.

In letters to investors, Telegram employees spoke specifically about “selling Gram,” and not about “selling shares in the right to acquire Gram,” SEC writes. In March 2019, Telegram employee Syam Pareh, in his correspondence with the investor, directly called Gram “securities”, writing that the investment fund, which requested 72.8 million tokens, has “full right to such securities”, and used this phrase and after.

Telegram promoted tokens as securities to experienced investors, and they, in turn, perceived them as investments similar to investments in securities, according to the SEC. Moreover, the company was aware of the existence of a secondary “gray” Gram market and was actively interested in the growth of quotations on it. This was done by Telegram Investment Advisor John Hyman, who sent information to Pavel Durov and Telegram Vice President for Development Ilya Perekopsky, according to the SEC. One of the letters says that Gram costs already 70–90 cents, and intermediaries charge 7-15%.

Moreover, the SEC claims that Telegram paid commissions to the Aton broker: it was about a commission of 10% of gross revenue for attracting new investors. Telegram had a similar commission agreement with Da Vinci Capital and one more with Space Investments, already 15% of gross revenue.

What's next

It is not yet clear whether the court will accept a request for expedited consideration of the case. The hearing is scheduled for February 18. As a rule, a court in summary proceedings in the United States lasts no more than three months. But the statistics on such cases are disappointing for Telegram: the courts satisfy about two-thirds of the claims.

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