Blockchain security company Quantstamp has agreed to pay ~$3.5 million in fines to settle charges against it from the U.S. Securities and Exchange Commission (SEC) on Friday – without confirming or denying allegations.

The settlement marks another successful crackdown from the agency against a crypto company for violating securities laws, which industry leaders say lack clarity regarding how they apply to digital assets.

Another SEC Legal Attack

The SEC’s charges – announced on Friday – accused Quantstamp of conducting an “unregistered initial coin offering (ICO)” in the form of its QSP tokens in late 2017.

QSP allows investors to purchase automated smart contract scans through Quantstamp’s protocol. However, the SEC claimed that the manner in which it was first distributed constituted a securities offering.

“Quantstamp raised over $28 million by selling “QSP” tokens to approximately 5,000 investors, including investors in the United States,” wrote the commission. “Quantstamp planned to use the ICO proceeds to develop and market an automated smart contract security auditing platform.”

When determining whether a token is a security, the SEC regularly cites the Howey Test – a decades-old legal precedent for identifying investment contracts. The test is widely understood to contain four prongs, two of which include an “investment of money” in a “common enterprise”.

The next two prongs require an expectation of profits from investors, based upon the efforts of another group.

Howey, Quantstamp, and Crypto

As the SEC claimed, Quantstamp “emphasized the large market potential for the smart contract security auditing product it planned to develop,” and therefore led investors to believe that the value of QSP would rise based on its team’s efforts.

“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,” said the SEC.

Quantstamp also agreed to pay the money back to injured investors. The team has not worked on its automated smart contract security auditing platform since June