Blockchain security company Quantstamp has reached a settlement with the U.S. Securities and Exchange Commission (SEC), agreeing to pay approximately $3.5 million in fines. The charges against Quantstamp were related to an alleged unregistered initial coin offering (ICO) conducted in late 2017. The settlement highlights the SEC’s ongoing efforts to enforce securities laws in the crypto industry, which many believe lack clarity.
According to the SEC, Quantstamp raised over $28 million by selling its QSP tokens to around 5,000 investors, including those in the United States. The tokens allowed investors to purchase automated smart contract scans through Quantstamp’s protocol. However, the SEC argued that the distribution of the tokens constituted a securities offering.
The SEC’s determination of whether a token is a security often relies on the Howey Test, which identifies investment contracts. The test consists of four prongs, including an “investment of money” in a “common enterprise” and an expectation of profits based on the efforts of others. In the case of Quantstamp, the SEC claimed that the company emphasized the market potential of its smart contract security auditing product, leading investors to believe that the value of QSP would increase based on the team’s efforts.
As part of the settlement, Quantstamp agreed to a cease-and-desist order and will pay disgorgement of $1,979,201, prejudgment interest of $494,314, and a civil penalty of $1 million. The company will also reimburse injured investors. Notably, Quantstamp has not worked on its automated smart contract security auditing platform since June 2019, as stated in the order.
This settlement comes after the SEC’s recent legal battle with Ripple Labs, where the court ruled that XRP tokens themselves do not qualify as securities. However, the court did find that Ripple’s initial distribution of XRP to institutional investors constituted a securities sale, resulting in Ripple being ordered to pay over $700 million in damages.
The SEC’s actions against Quantstamp and Ripple demonstrate the agency’s commitment to enforcing securities laws in the crypto space. As the industry continues to evolve, regulatory clarity will be crucial to ensure compliance and protect investors.