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Blog

Telegram Raises $1.7 Billion and Then Cancels Initial Coin Offering

JL Law

Telegram recently canceled its public initial coin offering after two rounds of private fundraising, as reported in the Wall Street Journal. Previously, Telegram stated they would move forward with an initial coin offering after having a private sale to accredited investors. The company initially raised $850 million in February from 81 investors and another $850 million from 94 investors the following month, which gives the company a total of $1.7 billion in investment capital. The previous leader in the ICO market, Filecoin, only raised $257 million from investors.  

The news comes as a shock for investors who wanted a chance to participate in one of the most highly anticipated crypto currency offerings of the year. Although the Russian company has not publicly confirmed why they decided to cancel their initial coin offering, industry experts speculate it was due to an uncertain regulatory environment and their record breaking fundraising efforts.  

The Rise of Fake ICOs

Before Telegram canceled its initial coin offering this month, several scam artists decided to create fake websites claiming to sell the company's tokens. Some fraudsters even went so far as to register a company or website using the real founder's name and information.

In response to the rise of fraud in the crypto currency industry, the Securities and Exchange Commission and Commodity Futures Trading Commission have issued subpoenas to several companies suspected of fraudulent initial coin offerings. Among other illegal practices, the Securities and Exchange Commission is starting to prosecute companies they suspect of selling unregistered investments and investigate businesses that may be distributing false or misleading marketing materials to potential investors. 

Telegram Will Focus on Its Blockchain Initiative  

The company announced that it now plans to use the money raised from the private sale to support Telegram Open Network (or TON), its ambitious blockchain initiative. The popular encrypted messaging application, which has over 200 million users per month, will continue working on the Telegram Open Network in the hopes that it will become one of the premier crypto currency wallets in the world. 

The Telegram Open Network consists of a highly scalable and flexible multi-blockchain architecture that can process millions of transactions per second due to hypercube routing mechanisms. Developers are building a Telegram Open Network payment platform for peer to peer payments and micro payments that can provide off-chain and on-chain transactions that are safe and secure. Additional features of the blockchain technology will include file storage, decentralized applications and encrypted browsing platforms. 

How This May Impact Future ICOs

Many people in the global crypto currency community are concerned about how the company's recent decision may impact the future of initial coin offerings. Historically, only a small percentage of the population (who were recognized as accredited investors by the government) were allowed to invest in new startup companies before the general public could purchase shares during an initial public offering or IPO. 

The original philosophy of crypto currency focuses on the decentralization of money. Initial coin offerings were created so that everyone could have equal access and the same opportunity to invest in future blockchain technology and crypto currencies. However, if more companies decide to follow in Telegram's footsteps and bypass the initial coin offering model and only offer crypto currencies to high net worth accredited investors, it could theoretically push the industry more towards centralization than decentralization. A centralized source of money and power from private investors is contrary to the core values of crypto currency. If only the wealthy have access to private pre-sales of crypto currency, it could make it more difficult for the general public to invest in blockchain technology. 

Conducting a generally solicited capital raise may require you to conduct verification of accredited investors.  Just because a company take money from private investors only does not exempt them from the need to verify that their investors are accredited investors if they are relying on the commonly used Rule 506(c) exemption of the Securities Act to raise capital.