The U.S. Securities and Exchange Commission (SEC) has taken action against Quantstamp, Inc. (QSP), a San Francisco-based firm, for executing an unregistered initial coin offering (ICO) involving crypto asset securities. In a bid to settle these charges, Quantstamp has agreed to relinquish the profits generated from the offering, in addition to paying a civil fine.
The Controversial ICO
As found by the SEC, Quantstamp conducted an ICO back in October and November 2017, raising a hefty sum of more than $28 million. The firm sold "QSP" tokens to about 5,000 investors worldwide, including those residing in the United States.
The company, in its offering materials, stated that the raised money would fuel the development and marketing of a new automated smart contract security auditing platform. Investors were led to believe that the success of Quantstamp's venture would increase the value of their tokens.
Potential Market and Violation of Laws
Quantstamp capitalized on the immense market potential for the product it proposed to develop. Post the ICO, it took steps to list the tokens on third-party digital asset trading platforms.
Despite filing a Form D claiming that the unregistered sales of QSP were exempt under Rule 506(c) of Regulation D and pursuant to Regulation S, Quantstamp failed to qualify for any exemption. This resulted in a violation of the federal securities laws regarding registration of offers and sales of QSP tokens, which were deemed securities.
Terms of Settlement
Without conceding to or denying the SEC's findings, Quantstamp consented to a cease-and-desist order and agreed to pay a disgorgement amounting to $1,979,201, prejudgment interest of $494,314, and a civil penalty of $1 million.
The order established a Fair Fund to compensate the affected investors. Quantstamp has also agreed to transfer all remaining QSP under its control to the Fair Fund administrator for permanent disposal or destruction.
In the aftermath of this settlement, Quantstamp, which completed its automated smart contract security auditing platform in June 2019, no longer operates or provides considerable support to the platform.
The SEC’s investigation was led by Amanda Straub of the Enforcement Division’s Crypto Assets and Cyber Unit, and the case was supervised by Crypto Assets and Cyber Unit Chief David Hirsch and Deputy Chief Jorge Tenreiro.
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