The U.S. Securities and Exchange Commission has obtained a temporary restraining order against Telegram Group Inc. over its 2018 TON blockchain token sale, claiming that the offering was an unregistered security.

Telegram, best known for its messaging app, launched its token sale in January 2018 before closing the offering in May 2018, having raised $1.7 billion in pre-sales.

The tokens were never offered to the public, the pre-sales coming primarily from private investors, including Russian billionaire Roman Abramovich, Sergei Solonin, founder of payment service provider Qiwi, and David Yakobashvili, founder of Wimm-Bill-Dann foods. Notable investors also included Benchmark Capital, Sequoia Capital and Lightspeed Venture Partners.

At all stages the money raised was declared in filings with the SEC as well, indicating that Telegram certainly thought it was raising the money legally by filing paperwork to match. The tokens sold, called Grams, were pitched as a currency on Telegram’s TON blockchain.

The SEC, on the other hand, is now claiming a year and a half later that Grams are securities and hence should have been registered under the Securities Act of 1933. “We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token,” Steven Peikin, co-director of the SEC’s Division of Enforcement said in a statement Friday. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”

The commission also alleged that Telegram failed to provide investors with information regarding business operations, financial condition, risk factors and management that the securities laws require.

The complaint seeks certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest and civil penalties.

“We were surprised and disappointed that the SEC chose to file the lawsuit under these circumstances and we disagree with the SEC’s legal position,” Telegram said in a response to the SEC filing.

The case raises questions not only about what constitutes a security, but as Nathaniel Popper of the New York Times noted, about its investors as well.

The SEC's move to shut down Telegram's crypto project raises questions about the big venture capital firms that gave it $1.7 billion and convinced themselves that it would pass regulatory muster. That includes Benchmark, Sequoia and Lightspeed.

— Nathaniel Popper (@nathanielpopper) October 11, 2019

Grams were set to become tradable as soon as the end of the month. Major companies such as Coinbase Inc. prepared to support them. The temporary injunction prevents that from happening.

The news comes two weeks after Block.one paid $24 million to settle a similar case with the SEC. In that case, Block.one was granted a waiver that removed any restrictions on its cryptocurrency going forward.

The case is set to be heard in the federal district court in Manhattan Oct. 24.

Image: Telegram