Quantstamp Agrees to $3.5 Million SEC Settlement Over Unregistered ICO

A recent settlement between blockchain security company Quantstamp and the U.S. SEC has led to a significant fine and the establishment of a compensation fund for affected investors.

Quantstamp, a blockchain security firm, has reached an agreement with the U.S. Securities and Exchange Commission (SEC) to pay approximately $3.5 million in fines.

The settlement comes as a resolution to charges brought against the company for conducting an unregistered initial coin offering (ICO) back in late 2017.

The SEC accused Quantstamp of offering its QSP tokens as an investment opportunity without registering the ICO as a securities offering.

As part of the settlement, Quantstamp has established a "Fair Fund" to compensate investors who were affected by the unregistered ICO.

The company will transfer its QSP token holdings to the administrator of the Fair Fund, where the tokens will be permanently disabled or destroyed.

This settlement represents another successful enforcement action by the SEC against a cryptocurrency company for violating securities laws.

The lack of clarity surrounding the application of securities laws to digital assets has been a challenge for the industry, as acknowledged by industry leaders.

When determining whether a token qualifies as a security, the SEC typically refers to the Howey Test, a legal precedent established decades ago to identify investment contracts.

The test includes four prongs, focusing on aspects such as an "investment of money" in a "common enterprise" and an expectation of profits based on the efforts of others.

Quantstamp's ICO raised over $28 million from around 5,000 investors, including those in the United States, with the promise of developing and marketing an automated smart contract security auditing platform.

The SEC found that Quantstamp had emphasized the potential market growth of its product, leading investors to anticipate rising value based on the company's efforts.

The SEC's settlement with Quantstamp includes a cease-and-desist order and requires the payment of disgorgement, prejudgment interest, and a civil penalty.

The team has not worked on its automated smart contract security auditing platform since June 2019, according to the SEC's order.

Quantstamp primarily operates as a security-auditing protocol focused on addressing smart contract security concerns on the Ethereum blockchain.

The project's main goal is to provide risk assessment and security services to encourage wider adoption of blockchain technology and safeguard the decentralized internet from hacking and theft.

It also sought to establish a distributed network of participants, including contributors, bug finders, validators, contract users, creators, and voters.

This diverse network collaboratively countered the impact of bad actors, facilitated governance, and offered significant computing power.