SEC Issues First Enforcement Action on NFTs: Impact Theory Targeted

New Crypto Offensive

The U.S. Securities and Exchange Commission (SEC) has made its first enforcement action targeting non-fungible tokens (NFTs), with media and entertainment company Impact Theory being the latest target. Impact Theory, based in Los Angeles, allegedly offered and sold unregistered securities through the sale of their ‘Founder’s Keys’ NFTs, raising nearly $30 million between October and December 2021.

Why NFTs Qualify as Securities

The SEC claims that the NFTs offered by Impact Theory qualify as securities because the company promised investors they would benefit from the collectibles, emphasizing their potential for “enormous value.” The SEC argues that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment in the company.

Impact Theory’s Agreement with the SEC

In response to the SEC’s enforcement action, Impact Theory has agreed to a cease-and-desist order, requiring the company to immediately stop offering and selling the NFTs and refrain from future violations. Additionally, Impact Theory will pay fines and interest totaling over $6.1 million and establish a fund to refund investors. The company has also agreed to destroy any Founder’s Keys it holds and eliminate future royalties from secondary market transactions.

SEC Employees Express Criticism

SEC commissioners Mark Uyeda and Hester Peirce have publicly stated their disagreement with the SEC’s enforcement action against Impact Theory. They argue that the NFT sales in question do not meet the criteria outlined in the Howey test, a legal framework used to determine if a transaction qualifies as a security. They also note that this enforcement action puts the SEC in uncharted territory as it is the first of its kind regarding an NFT issuer.

It is worth noting that earlier this year, major cryptocurrency exchanges Binance and Coinbase were also targeted by the SEC for alleged violations of federal securities laws.

In conclusion, the SEC’s enforcement action against Impact Theory marks a significant milestone in the regulation of NFTs. While the decision is not without its critics, it highlights the SEC’s increasing scrutiny of the crypto space and its commitment to protecting investors from potential risks associated with unregistered securities. As the NFT market continues to evolve, it remains to be seen how regulators will adapt to address the unique characteristics and challenges posed by this new asset class.

Tags: SEC, Impact Theory, NFT, non-fungible token, securities