Investors in Telegram’s TON project are in discussion to sue the company after it abruptly shuttered the blockchain effort earlier this week, according to four individuals familiar with the situation.
It’s not the ambitious project being shut down that upset investors but the options they were given: Take back 72% of their investment immediately, in accordance with a contract amendment from 2019, or loan the funds to Telegram for a year and get back 110% in April 2021.
Telegram spent $405 million from the $1.7 billion token sale proceeds developing both TON blockchain and its messaging app, but those expenditures brought zero value to the investors, said Vladimir Smerkis, head of crypto startup Tokenbox and one of the investors.
“We are considering filing a lawsuit, as the money [Telegram CEO] Pavel Durov spent on the project got investors nothing, while at least, it would be fair to talk about getting Telegram’s equity, for example,” Smerkis said.
In his estimation, about a half of the investors might be considering lawsuits at the moment, and about half as many will actually do it. Three other individuals who did not wish to be named, including another investor in TON and two funds who consulted with such investors, said potential litigation is being actively discussed.
CoinDesk reached out to Telegram for comment on the potential lawsuits and comments by a former employee about the company’s financial status but did not hear back by press time.
“There are funds that are considering a class action against Telegram,” one of the investors told CoinDesk, though he said he does not plan to participate.
Investors in the U.S., Europe and Russia are now discussing these potential lawsuits, he said.
“Many people are upset that the project is over. Knowing Durov’s business acumen, we hoped he would fight for the existence of TON, but apparently the risks he faced exceeded the upside he could get if the project was launched,” Smerkis added.
There was a group of investors that “said they will be with Durov until the end,” Smerkis said. However, the end was announced earlier this week by Durov himself. “On the conference calls with other investors, I can see that people are unhappy and are planning to get their money back and later sue in order to either get more money back or some of [Telegram’s] assets,” Smerkis said.
Quitting it
The fate of TON had been hanging by a thread since Telegram lost in federal court to the U.S. Securities and Exchange Commission (SEC), which said its planned blockchain tokens, called grams, were unregistered securities. On Wednesday, the story came to a dramatic end: Durov, in an announcement, said the project is over.
“For the last 2.5 years, some of our best engineers have been working on a next-generation blockchain platform called TON and a cryptocurrency we were going to name Gram,” Durov said, but “a U.S. court stopped TON from happening.”
Blaming the U.S. regulators, which can “shut down any bank or bank account in the world” or “use its control over Apple and Google to remove apps from the App Store and Google Play,” Durov announced Telegram will stop developing TON.
Some investors have already received 72% of their initial investments under option one and have no plans to make Telegram’s life any harder. Two of these investors, including Anatoly Knyazev, executive director of the investment firm Exante, confirmed to CoinDesk their refunds had been received.
“It was a venture investment, we fixed our loss,” Knyazev said.
Another investor, BitScale Capital founder Zurab Kazhiloti, said he took the second option and loaned the money to Telegram to see what happens.
“We can wait one more year. Pavel’s team has got us surprises before, so we believe in a positive outcome,” Kazhiloti said.
His optimism goes even further than that because Bitscale Capital joined the community launch of a network based on the TON code, named Free TON, as a validator, he said.
“We all are grateful to Nikolai Durov [Telegram’s CTO and Pavel’s brother] for the code he wrote. Not to launch it would be unreasonable,” Kazhiloti said, adding he hopes the network can attract many validators, services and users in future.
Not everyone feels that uplifted. The head of a venture fund located in Eastern Europe consulted by some TON investors and who asked not to be identified, said investors in America and other regions believe getting back 72% of their investments does not make a “ton” of sense.
“No venture fund wants to wait two years and then get back 72%. It’s better to lose the money altogether,” this person said.
The trust between Durov and Telegram’s investors can be seriously eroded, he added, because the company has been unpredictable in its decision-making and lacks clear two-way communication with itsinvestors.
Some investors were especially insulted that Telegram did not offer them equity after they effectively funded the company’s messenger app, the fund manager said. Durov said during a court deposition that Telegram did not separate the resources it spent on the app from the ones it spent on the blockchain project.
“They showed the investors their place: They don’t want all those various gram purchasers to become shareholders,” the fund manager said. “And it’s disrespectful. You take money from these people but you share the upside with others. You’re spending your investors’ money. Won’t you consider their interest?”
The launch of Free TON also didn’t look good to many investors. Hinting on the possibility that Telegram might have given a green light to the project, the managing partner of Mindrock Capital investment firm Pavel Cherkashin wrote an op-ed in the Russian version of Forbes.
“Investors would support a crusade against the American justice system,” Cherkashin wrote. “What they were not ready for was that Durov would yell “Every man for himself,” jump ship and launch Free TON, repeating the same trick Vkontakte did,” he added, pointing out that Durov’s team started working on the Telegram messenger while employed by his first company, Vkontakte, which caused a conflict among the shareholders.
Equity hopes
According to the fund manager, some investors are still hoping to negotiate an equity deal, but it’s not clear what the value of such equity would be (Durov has publicly rejected both subscription and advertising revenue models and had been funding Telegram out of his own pocket before the token sale).
Yakov Barinsky, CEO of HASH CIB, an investment firm consulted by gram purchasers, told CoinDesk some investors had been expecting to turn their token allocations into shares in Telegram from the start, and they are not planning to let those expectations go.
“There is a group of investors who believe they deserve equity, and they are going to fight for it,” Barisky said.
Part of this fight might be taking money back now, he added. “Those with the most aggressive attitude believe if they take the loan offer, they will effectively lose the right to negotiate with Telegram based on the current agreement as they enter a new one.”
Pavel Durov has famously been unwilling to dilute his ownership of Telegram, and, according to company spokesperson Remi Vaughn, an equity distribution is definitely not on the table now. However, recent weeks show investors can apply enough pressure to influence Telegram’s strategy at least partly.
After the first refund-or-loan offer was circulated, Telegram detailed new loan terms in an email on May 6. Investors would receive 72% of funds plus interest when Telegram repaid them sometime over the coming year, rather than the 110% previously agreed to. The company walked back these terms after pushback from the community, according to the investors.
Anton Rosenberg, a former Telegram employee fired by Durov, said that if Durov has to return all the money he raised, Telegram will have no funds for its operations.
“Telegram was running out of money in 2017 already, so the last two years it has been spending the TON investors’ funds,” he said.
Now, with the pandemic and the global crisis, it will be quite hard to find an investor willing to buy Telegram, said Rosenberg.
“Some investors are even discussing if Durov can just run away with the money – more as a joke, of course. And some are trying to figure out the chances to get back the entire investment amount via the court,” he said.
A fund manager familiar with the TON investors in the U.S. told CoinDesk several investors were definitely preparing to take on Telegram in court.
“Not sure that they will win. But it is America, so I am sure that they will sue!” he said.
EDIT (9:20 UTC, May 15, 2020): A previous version of this article included outdated information on Pavel Cherkashin’s involvement with Vestor.In Partners. He is now the managing partner of Mindrock Capital.
UPDATE (12:45 UTC): Investor Zurab Kazhiloti has now told CoinDesk that the fund he invested through has decided to accept a refund from Telegram, and as such he will not be leaving his investment with the firm.