Rip Saft

I opened up Dan Primack’s daily email (I suggest you subscribe to it here) and saw a report that Telegram was giving back $1.7B.

Mr. Primack wrote:

The largest initial coin offering in history has been voided, with investors to be refunded most of their $1.7 billion.

Driving the news: Encrypted messaging service Telegram settled with the SEC, which had charged the company with failing to register its tokens as securities. In addition to the refunds, it will pay an $18.5 million penalty.

Backstory: Telegram in 2017 decided to develop its own blockchain platform and native cryptocurrency, and in early 2018 raised $1.7 billion via two sales from purchasers like Benchmark, Lightspeed Ventures, Ribbit Capital, and Sequoia Capital.

• The SEC last October sued Telegram, alleging that the tokens were unregistered securities.
• Telegram asked purchasers to extend the launch deadline for their blockchain platform from October 23, 2019, to April 30, 2020. A majority of purchasers approved the extension, which also allowed Telegram to spend up to another $80 million in token sale proceeds.
• A U.S. District Court judge agreed with regulators in March, and issued a preliminary injunction.
• Telegram publicly abandoned its blockchain platform in May, but not after spending nearly $500 million raised via the ICO.

Settlement: Telegram says it has repaid the remaining $1.22 billion, either in cash or via loans that mature in one year with a 10% coupon.

• The SEC did not require Telegram to admit or deny liability, which has become par for the course in SEC settlements.

Between the lines: Some very smart investors made a very big miscalculation. Not just in their original purchase, but also in voting to extend Telegram’s project.

This is likely the final nail in the cat offin for SAFT agreements, whereby crypto project developers sold tokens first and delivered them later.

• Such structures were designed to bypass securities registration requirements, but regulators and the court felt it was a legal distinction without a difference.
• If Telegram couldn’t adequately defend itself with its massive bankroll, it’s hard to see success for small blockchain developers.

The bottom line: RIP SAFTs (2017–2020).

Making sense of all this is difficult.  My friend former SEC attorney Pat Daugherty penned some nice thoughts here.  Pat is a partner at Foley & Lardner where he directs a corporate, mergers and acquisitions, finance, financial regulatory and fintech practice devoted to capital formation, innovation and return of and on investment. He also leads the firm’s blockchain practice.

As Pat illustrates, there are very large benefits to having many assets tokenized and digitized.  It can bring liquidity and create more efficient markets where they don’t exist.  That will benefit society.