SEC accuses Quantstamp of conducting an unregistered ICO

Under a cease and desist order issued on 21 July, the SEC accused Quantstamp of conducting an unregistered ICO (Initial Coin Offering) of crypto assets in 2017. 

During the ICO, Quantstamp managed to raise more than $28 million by selling its QSP tokens to about 5,000 investors. 

The company promised to use the funds generated from the ICO to develop a protocol on the Ethereum blockchain that would provide automated security controls on smart contracts.

After Ripple, the SEC moves on to Quantstamp, but this time the indictment starts with the ICO

The SEC’s charges against Quantstamp suggest that the company marketed QSP tokens to investors with the expectation that the value of the tokens would increase with Quantstamp’s successful venture. 

Subsequently, the company took steps to make the tokens tradable on third-party digital asset trading platforms after the ICO.

Quantstamp defended its actions by claiming that QSP sales were exempt from registration. 

However, the SEC refuted this claim, stating that the company did not qualify for any exemption from registration. As a result, Quantstamp chose to settle with the SEC without admitting or denying the allegations. 

As part of the settlement, the company agreed to pay nearly $2.5 million in disgorgement and anticipated interest, as well as a $1 million civil penalty.

This settlement comes on the heels of the recent ruling in the case between the SEC and Ripple. 

The judge in the Ripple case applied the well-known Howey test, which determines whether a transaction qualifies as an investment contract and, therefore, a security under federal law. 

The judge ruled that although XRP may not qualify as a security when it is traded on an exchange, its institutional sales constitute an unregistered securities offering.

Drawing a parallel, the SEC’s claims against Quantstamp appear to revolve around the notion that QSP’s purchasers had a reasonable expectation of profit from the company’s efforts. 

This is in line with the criterion of the Howey test, which examines whether investors expect profits from the efforts of others.

The moves of the Web3 company Quantstamp

During the ICO, Quantstamp made statements about the potential profitability of the protocol it planned to develop. 

The company suggested that the automated smart contract security monitoring platform it intended to create would be profitable, given the potential costs associated with smart contract failures.

Unfortunately, despite completing the automated smart contract security audit platform in June 2019, the company is no longer operational, which may have made SEC enforcement actions and settlement negotiations more complex.

The SEC’s decision to sue Quantstamp soon after the Ripple ruling underscores the agency’s commitment to enforcing securities laws in the cryptocurrency and blockchain space. 

It serves as a reminder to other blockchain and cryptocurrency companies that the SEC is actively monitoring and regulating the industry, and companies must be diligent in complying with relevant regulations to avoid similar enforcement actions.

As the cryptocurrency and blockchain industry continues to evolve, regulators are likely to monitor it ever more closely. 

It is essential that companies operating in this space seek legal counsel and ensure compliance with securities laws and regulations to reduce potential risks and legal consequences. 

This proactive approach will not only safeguard investors’ interests, but also contribute to the long-term growth and legitimacy of the industry.

The case of Quantstamp is an essential lesson for other blockchain companies that have conducted or are planning ICOs. 

It underscores the importance of understanding the legal implications of token sales and ensuring compliance with applicable securities laws. 

Startups and projects in the cryptocurrency space should seek out blockchain regulatory experts to successfully navigate the complex legal landscape.

Conclusions

Blockchain technology has the potential to revolutionize a number of industries, from finance to supply chain to healthcare to governance. 

However, to fully exploit this potential, it is critical to strike a delicate balance between promoting innovation and protecting market participants.

The SEC’s recent charges against Quantstamp after the Ripple ruling leave a message in the cryptocurrency and blockchain ecosystem. They underscore the need for increased regulatory oversight and the importance of securities law enforcement. 

As the industry continues to grow, collaboration between industry players and regulators is critical to establish consistent and transparent regulatory frameworks that promote innovation and protect investors. 

Only through these collective efforts can the cryptocurrency and blockchain industry truly realize its potential as a transformative force in the global economy.