SEC Files Charges Against Quantstamp After Ripple Ruling

SEC Targets Blockchain Security Firm Quantstamp

In the aftermath of the recent legal battle between the U.S. Securities and Exchange Commission (SEC) and Ripple, the regulatory agency has now turned its attention to Quantstamp, a blockchain security firm, filing charges of alleged violations dating back six years.

According to a cease-and-desist order issued on July 21, the SEC accused Quantstamp of conducting an unregistered initial coin offering (ICO) of crypto securities in 2017. The company purportedly raised over $28 million by selling QSP tokens to approximately 5,000 investors, with the intention of funding the development of a protocol on the Ethereum blockchain for automated security audits of smart contracts.

Quantstamp is accused of enticing QSP purchasers with the expectation that the tokens' value would rise alongside the success of the enterprise. Following the ICO, the firm took measures to enable trading of the tokens on third-party digital asset trading platforms, as stated by the SEC in a recent news release.

Despite claiming that the unregistered sales of QSP were exempt from registration, Quantstamp failed to meet the requirements for any exemption, according to the SEC.

As a result of the charges, Quantstamp agreed to a settlement without admitting or denying the SEC's findings. The terms of the settlement require the company to pay nearly $2.5 million in disgorgement and prejudgment interest, along with a $1 million civil penalty.

Interestingly, this settlement comes approximately one week after a US district judge delivered a long-awaited ruling on the SEC's accusations against Ripple regarding the sale of its XRP token. The court used the Howey test to determine whether XRP qualified as an investment contract and, therefore, a security under federal law. While XRP traded on exchanges was deemed not to be a security, institutional sales of the asset were considered an unregistered securities offering.

Similarly, the SEC cited that QSP purchasers had a "reasonable expectation of profit from Quantstamp's efforts," which led to the charges against the blockchain security firm. It is important to note that Quantstamp's smart contract security auditing platform, which was finalized in June 2019, is no longer operational