In the wake of the recent legal dispute between the U.S. Securities and Exchange Commission and Ripple, the agency has now turned its attention to Quantstamp, a blockchain security company, and filed charges of alleged violations extending back six years.
The Commission asserts that Quantstamp enticed investors by promising that the token’s value would increase proportionally to the project’s success.
SEC will not stop coming after crypto organizations
According to a cease-and-desist action issued on July 21, the SEC accused Quantstamp of conducting an unregistered initial coin offering (ICO) of crypto securities in 2017. The startup allegedly raised more than $28 million by selling QSP tokens to about 5,000 investors in order to support the development of an Ethereum blockchain technology for automatic security audits of smart contracts.
Quantstamp is accused of luring QSP buyers with the promise that the tokens’ value would increase in tandem with the enterprise’s success. According to a recent Commission press release, following the ICO, the company made steps to enable trading of the tokens on third-party digital asset trading platforms.
According to the Commission , despite claiming that unregistered sales of QSP were exempt from registration, Quantstamp failed to satisfy the requirements for any exemption.
Quantstamp agreed to a settlement as a result of the charges without admitting or rejecting the Commission’s findings. According to the terms of the settlement, the business must pay almost $2.5 million in disgorgement and prejudgment interest, as well as a $1 million civil penalty.
What is the problem, and why is this an issue?
The platform aimed to use the money from its initial coin offering (ICO) to “develop and market” its automated smart contract security auditing platform. The Commission order emphasized the entity’s conclusion that Quantstamp emphasized the “large market potential” of its service, leading QSP buyers to expect the value of their tokens to rise.
According to the regulatory Commission , Quantstamp failed to register its issuance and sale of QSP tokens, which the entity assessed to be securities.
The SEC’s order finds that Quantstamp violated the registration provisions of the federal securities laws. Without admitting or denying the [Commission’s] findings, Quantstamp agreed to a cease-and-desist order and to pay disgorgement of $1,979,201, prejudgment interest of $494,314, and a civil penalty of $1 million.
SEC
In addition, the decree stipulates the establishment of a “Fair Fund” to reimburse affected investors. Additionally, the company agreed to transfer its own QSP token holdings to the administrator of the Fair Fund, with the tokens to be “permanently disabled or destroyed.”
Quantstamp no longer administers or actively supports the automated smart contract security auditing since its deployment in June 2019.
Interestingly, this settlement was reached approximately one week after a US district judge issued a long-awaited judgment on the Commission’s allegations against Ripple regarding the sale of its XRP token.
The court applied the Howey test to determine if XRP qualified as an investment contract and, thus, a security under federal law. While XRP traded on exchanges was not regarded to be a security, institutional sales of the asset were deemed to be an unregistered securities offering.
In a similar vein, the Commission stated that QSP purchasers had a “reasonable expectation of profit from Quantstamp’s efforts,” which led to the allegations against the blockchain security company.
