Blockchain security firm Quantstamp recently settled with the U.S. Securities and Exchange Commission (SEC) in connection with an unauthorized initial coin offering (ICO) in 2017. The SEC filed charges against the San Francisco-based company for conducting an unregistered ICO of crypto asset securities, leading to a settlement that mandates the refunding of the ICO proceeds.
The settlement requires Quantstamp to pay a disgorgement of $1,979,201, prejudgment interest of $494,314, and a civil penalty of $1 million. The ICO raised over $28 million by selling “QSP” tokens to around 5,000 investors, including those in the United States, during October and November 2017. The company had plans to utilize the ICO proceeds to develop and market an automated innovative contract security auditing platform.
However, the SEC found that Quantstamp failed to register its offers and sales of QSP as securities and did not qualify for an exemption to registration despite previously claiming an exemption under Rule 506(c) of Regulation D and under Regulation S through Form D filing.
The SEC’s complaint revealed that Quantstamp emphasized the vast market potential for its smart contract security auditing platform, leading purchasers of QSP tokens to expect an increase in token value with the company’s success. Furthermore, Quantstamp made the tokens available for trading on third-party digital asset trading platforms following the ICO. Although the automated intelligent contract security auditing platform was completed in June 2019, the company no longer operates or substantially supports it.
As part of the settlement, the SEC established a Fair Fund to return the monies paid by Quantstamp to “injured investors.” The company must also transfer all remaining QSPs under its control to the Fair Fund administrator, where they will be permanently disabled or destroyed. It is worth noting that the amount available for distribution may be less than the original investment amount due to factors such as administering the Fair Fund, the number of eligible investors, and available funds.
Quantstamp must also publish notice of the SEC’s order on its website and inform crypto trading platforms that offer QSP for trading. The SEC’s order will likely have significant ramifications for Quantstamp’s future operations as the company will need to address the concerns raised by the SEC and ensure full compliance with regulatory requirements moving forward.
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