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The U.S. Securities and Exchange Commission (SEC) has announced a $3.5 million settlement with Quantstamp which was charged with violating securities laws in its 2018 initial coin offering (ICO).

Quantstamp raised $28 million in its ICO in October and November 2017 by selling its native QSP tokens to over 5,000 investors, the SEC alleges. The token was a security per the Howey test, and the California-based company violated federal securities laws.

Quantstamp launched in 2017 as a platform for automating security audits on smart contracts. The founder, Richard Ma, said he was inspired to launch the platform after almost losing all his money in the Ethereum DAO hack in 2016.

Ma and his team raised $28.35 million in the form of 87,000 ETH, surpassing an initial goal of $11 million as ICO popularity surged. They claimed the funds would be channeled to funding the development of the protocol.

While the team initially developed the protocol, cracks quickly showed. Just months after the ICO, the team came under fire from investors for accepting ETH and the U.S. dollar as payment for audits. This undermined the market prospects for the native QSP token, which Ma and his team had pledged to prop up, investors claimed. In addition, the team stopped supporting the protocol a couple of years after the ICO.

SEC alleges that the Quantstamp team led investors to expect profit from its efforts, two of the key considerations of the four-pronged Howey test.

The company filed a form with the SEC arguing that the sale of QSP tokens to foreign investors was exempt from federal securities laws. However, it violated the stipulations of this exemption by selling to non-accredited U.S. investors.

Quantstamp settled with the SEC without admitting or denying the charges. It agreed to a cease and desist order and the disgorgement of $2 million, a civil penalty of 1$ million, and prejudgement interest of $500,000.

Watch: U.S. Congressman Patrick McHenry on Blockchain Policy Matters

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