Exclusive: Telegram is holding a secretive second pre-ICO sale

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You have to admire Pavel Durov’s audacity.

Over the past few months, the CEO of Telegram convinced 81 accredited investors, including Silicon Valley giants Sequoia Capital and Benchmark, to give him $850 million in a presale of his company’s cryptocurrency in advance of an initial coin offering, or ICO. Now he’s trying to raise even more money from accredited investors before the coin gets offered to the public in a secretive second presale.

This week, investors got an email explaining that Telegram is doing another private presale, four sources with knowledge of the deal told The Verge.

The exact amount to be raised is still being determined, according to one source, but two other sources said Telegram is estimating it will be around the same size as the first round, which would bring the total raised to over $1.6 billion before the ICO even opens up to the general public. Telegram’s offering was already the largest ICO ever, dwarfing the previous record of $232 million. Telegram declined to comment on the second presale. Sequoia Capital declined to comment and Benchmark did not respond to questions.

The change in Telegram’s plans comes as the company is under scrutiny for its proposed Telegram Open Network or TON, which promises to be an Ethereum-like ecosystem with apps, services, and a store for digital and physical goods. Critics say the proposal is short on technical details, and that Telegram’s high valuation is being driven by hype and speculation rather than the value of the technology.

How much money is Telegram raising total? Estimates have varied. The company seemed to revise its goals upward as interest in the offering surged. One cryptocurrency and blockchain investor, Carlos Mosquera of Solidus Capital, said the numbers presented by Telegram kept changing; he was offered different versions of the offer from different intermediaries. Discounts on the presale coins ranged from 30 to 80 percent of the expected public price, according to multiple investors who were pitched on the first presale. “A month and a half ago we got the pitch and the opportunity for Telegram,” Mosquera said. “We passed because we received two or three different terms and deals by the same ICO. None of the information was clear.”

Mosquera’s firm was not invited to participate in the second presale, but he said he isn’t surprised to hear that Telegram is looking for more private investor cash. “Nowadays the presales are hotter than the crowd sale itself,” he said.

It makes sense for Telegram to raise more private money if there is enough demand, multiple investors told The Verge. The first presale was rumored to be oversubscribed, and early investors are reportedly flipping their shares and making 2x returns on the secondary market.

The SEC has also been increasing its oversight of ICOs, which means Telegram may not make its public ICO available in the US, CNBC reported. That could be part of the reason why Telegram wants to get more money from accredited investors — meaning firms and individuals with annual income of $200,000 or a net worth of $1 million — because there are fewer regulatory requirements through that process than through an offering to the general public.

Telegram’s public ICO was expected to take place in March. It’s unclear if the new second private offering affects the timeline for the public sale or how many coins will be available to the public at launch.

Telegram’s ICO is one of the most anticipated the cryptocurrencies world has seen, and it’s the first to attract more traditional Silicon Valley venture capital firms. But observers are skeptical of its value offering.

Telegram’s ICO will fund a suite of blockchain-based products including file storage, a DNS service, and an ad exchange as part of the TON, according to the 132-page “technical white paper” circulated to investors. Critics say the proposal makes ambitious claims, such as being able to process millions of transactions per second, without explaining how.

Christian Catalini, a professor and founder of MIT’s Cryptoeconomics Lab, is working on a study of about 1,500 ICOs with his team. “We actually document in our research paper that there has been a major transition from more technical white papers to the kind of white papers that look a lot more like sales pitches,” Catalini told The Verge. “There’s been less focus on technical details over time and, for some of these, much more on selling the vision. In the case of the Telegram one there is a lot that is being promised and not a lot of clarity on how that would be delivered.”

Matthew Green, cryptographer and professor at Johns Hopkins University, had a similar reaction to the white paper. “So to their credit, Telegram has shown that it can execute and get software written. That’s actually a big deal when it comes to blockchain projects,” Green said in an email. “That plus millions of dollars means they could pull something off. But I’ll be honest, the white paper reads like someone went out on the internet and harvested the most ambitious ideas from a dozen projects and said ‘let’s do all of those but better!’ It feels unachievable, at least at the scale they’re aiming for now.”

Even if the Telegram team had included more technical details, not everyone is convinced it makes sense conceptually. Telegram is effectively proposing to act as a benevolent dictator — it will control a majority of its currency, at least to start — helping a system that will eventually be decentralized get off the ground.

“Blockchains are useful when there’s no central authority in command, or when there’s risk that the owner of the platform might fold,” Emin Gün Sirer, a professor at Cornell, expert on distributed systems, and co-director of the Initiative for Cryptocurrencies and Contracts, said in an email. “Yet Telegram ICO’s appeal stems from its reach to 200 million users, and its central vision over the future of the platform. If the owner folded, there would be little value to what remains. So their adoption of a blockchain, in fact, a whole family of blockchains, seems spurious.”

Others have speculated that Durov is not really raising money for a new blockchain-centric venture, but simply to keep Telegram afloat. Durov was reportedly self-funding the company with his earnings from selling VK.com, the Russian Facebook clone that he founded. “With growing user base, he would’ve eventually run out of money. Therefore he opted for an ICO as a mechanism to raise funds without getting outside investors into Telegram’s shareholder capital,” Gregory Klumov, CEO of the government blockchain company Stasis, told Bloomberg.

Charles Noyes, a quantitative analyst at the cryptocurrency VC firm Pantera Capital, said his team passed on Telegram’s private presale the first time around. (His firm did not get the offer for the second presale.) To him, the secretive Telegram ICO goes against the spirit of blockchain development.

“It’s very important in blockchain technology and specifically cryptocurrencies that you be very open with what you’re trying to do and have as many people as possible looking at it to see if they can find a flaw,” he said. The Bitcoin white paper was first published to a cryptocurrency mailing list, and its pseudonymous author Satoshi Nakamoto requested feedback. Not inviting outside scrutiny is dangerous, Noyes said. “When you operate the way they do, which is closed, with secrecy, not subjecting yourself to peer review, you basically open yourself up to the possibility that there is a trivial bug in it that destroys the network.”

Whether the platform functions well may not matter for early investors. Even with the lockup period that restricts them from selling their tokens right away, investors who bought their coins at a discount could see a significant return after the ICO opens up to the broader public and starts circulating on the TON. Telegram can also promote its ICO to its users, who numbered 170 million in October 2017 according to one of the presale documents, and its app has become a hub for cryptocurrency chat groups.

“Telegram as a messenger may attract them to Telegram’s new network,” said Alan Woodward, a visiting professor at the University of Surrey, expert in cryptography and information security who has criticized Telegram in the past for using proprietary cryptography instead of commonly accepted, peer-reviewed cryptography. “Something seems to have worked,” he wrote in an email, “in that they have raised a lot of money already.”

Additional reporting by Casey Newton and Lauren Goode


If this is not a securities offering I don’t know what is.

That’s likely why they’re doing a second presale to accredited investors-the SEC is cracking down but it’s not illegal to sell securities to accredited investors.

They’ll likely only offer the ICO to non-US citizens and also exclude other countries that restrict such securities sales. Not everyone country has laws against everyone investing in random securities.

I’m trying but it is so hard for me to wrap my head around this blockchain and cryptocurrency thing. It just seems crazy to me that they can raise billions in capital so quickly without giving up any equity in the company.

Well, it works both ways… Let’s take a Silicon Valley large investor as an example. They have $10m to invest. They could go the normal startup method and invest in a company and get a stake in that company. Regardless of what that stake is worth they have to either a) find a buyer on a secondary market or b) wait for an exit event. They also get a say in how the company operates and moves forward, but this requires time and resources.

Whereas, in this instance, they are prebuying coins for Telegram. Again, for examples sake, let’s say they get 10m coins for their $10m. They can cash out at any time once the coins are actively traded, or as the article has stated, flip those coins prior to that and make money.

In my opinion it’s just another avenue to make money in a risky marketplace. Remember, these companies really don’t care about guiding startups, they just want to make money. ICOs and "Pre-ICOs" are a way to do that with much less time/energy for potentially much quicker return on investment.

I get it, they’re foregoing equity for liquidity. I just don’t get the amounts. A company like this would never be able to raise over a billion dollars through normal avenues. Yet, they can sell a digital coin and get over $1.5 billion without giving up any ownership. It’s just amazing. On the flip side, no equity is given up but the resulting tax bill is huge.

what it should tell you is that the money flush people know that – anyone can now wave about an empty bag full of air and people will buy it in droves.

so… if they can make the empty bag even bigger with catchy numbers like "a billion" then even more people will.

so the money people can then hand over the empty bag to the great unwashed in exchange for real cash.

this shit is better than when they used to buy humans in exchange for beads.

What’s with all the opinion injected into this?

First time to The Verge, I assume?

Not hardly. I was here in the This Is My Next days.

I was being sarcastic.

It’s ok buddy.

Sometimes it can be fun, sometimes it’s too much. A delicate balance indeed.

Lol, secret? I heard about this ico at least a month ago.

oi, what happened in vegas is meant to stay in vegas

Investors are going to get killed on this, just to break even TON will need to be in the top 10 cryptocurrencies in terms of market cap and that’s assuming the primary ICO doesn’t completely dilute out early investors. Even worse, with such large amounts of tokens held by huge investors it leaves little reason for normal people to choose this blockchain since you’re basically just letting a bunch of silicon valley VCs get ultra rich. I don’t really blame Telegram though, if investors want to throw billions at you to buy tokens for a product that doesn’t exist yet you’d be silly not to take the sacks of money, but this is really just preying on silicon valley investor types who have no experience in the blockchain space. The only real folks winning at probably the ones flipping the presale itself for a guaranteed profit, probably the only real strategy that’s going to yield any real returns here. I run a small blockchain focused company myself but in my experience these ICOs that raise huge amounts end up being much bigger headaches than under the radar projects.

I just came across another ICO that had a theoretical token cap of 200M units and they have already priced each token at upwards of 1USD.
And conglomerates(own multiple companies in the supply and retail chain) in the same industry, which have millions in physical assets, an entrenched customer base and are operating the business in profit are valued at approx 500M!
This is madness! All these guys have is a whitepaper and a (bad)dream!.

I really love Telegram. It’s really the best messenger especially combined with its desktop app.

Cashgrab by Telegram waving vaporware at rich sheeples. I switched to Signal a long time ago.

I’ve always thought that the rules determining who is and isn’t an accredited investor were less about the line between sophisticated and unsophisticated investors and more about keeping up the masquerade ("Keep the poors out so that they don’t realize just how terrible our judgment really is/just how badly structured the markets would be if they were truly open to all interested parties"). This isn’t exactly challenging that perception.

You’d be surprised to know how many idiots are in the accredited investors world. They have no fu*king clue in what they invest sometimes just because they hear is hyped.
Telegram seems over-hyped already and it just doesn’t make sense to invest in crowdsale when it’s out. By the time they deliver any project the market is saturated with already started projects that worked on the blockchain foundation. Audiences migrate fast from platform to platform. Anyone remember Snapchat? They kind of start flopping. Slack as well is losing market to Discord.
Best performance chains around are Eos and Lisk. In few months will both be out and people can build on top blockchain 3.0

All I want to say is "Juicero"

I feel bad for the average person that gets burned by this. A few large investors are going to hold a large some of the coins, pump it with hype, the. Sell out when it’s high and let come crashing down on all the average people that bought into it.

Block chain is cool, but crypto cu

Telegram needs iOS to succeed. What happens when Apple removes them from the app store because they are no longer getting 30% clip on transactions in the form of real cash??

This is a really good point. Someone should look into whether the appstores will want to take cuts of currencies being traded on apps in their stores.

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