SEC fines company $6m for selling NFTs as “investment contracts”

• Impact Theory has been directed to pay over $6.1 million in disgorgement, prejudgment interest, and a civil penalty.
• Two SEC commissioners have expressed their dissent regarding this decision.

The United States Securities and Exchange Commission [SEC] has taken significant action against a media and entertainment company, Impact Theory, for engaging in unregistered securities sales involving Non-fungible Tokens [NFTs] during October and December 2021.

Impact Theory, situated in Los Angeles, specializes in producing entertainment and educational content, including podcasts.

The SEC’s investigation reveals that the company managed to raise approximately $30 million through the sale of NFTs known as Founder’s Keys, offered across three tiers.

The SEC’s stance is rooted in Impact Theory’s apparent encouragement of investors to consider their purchase of a Founder’s Key as a direct investment into the company. It asserted that it was striving to become the “next Disney,” and that this achievement would yield substantial value to those purchasing Founder’s Keys.

After examining the situation, the SEC concluded that these NFTs qualified as investment contracts and thus should be treated as securities. Consequently, the company’s actions violated the Securities Act of 1933 due to the absence of proper registration.

To address this, the SEC issued a cease-and-desist order, to which Impact Theory consented.

Case sets precedent for regulatory oversight on NFTs

Impact Theory has been directed to pay over $6.1 million in disgorgement, prejudgment interest, and a civil penalty. Despite agreeing to this settlement, the company neither admitted to nor denied the agency’s findings.

Moreover, as part of the resolution, a fund will be established to reimburse investors who purchased Founder’s Key NFTs. To ensure compliance, Impact Theory will destroy all the Founder’s Keys in its possession, publish the order’s notice on its websites and social media platforms, and forgo any royalties from future secondary market sales of the NFTs.

This enforcement action by the SEC marks a significant milestone, as it is the first instance where the agency has intervened in matters relating to NFTs. However, two SEC commissioners, Hester Peirce and Mark Uyeda, expressed their dissent regarding this decision. They argued that the NFTs in question didn’t resemble shares of a company and didn’t offer dividends to purchasers.

Despite acknowledging concerns about the hype driving individuals to spend substantial sums on NFTs without a clear understanding of their utilization or potential benefits, they asserted that this concern alone isn’t sufficient to bring the case under the SEC’s jurisdiction.

The SEC’s move highlights its increasing focus on regulating the NFT space, especially when it comes to issues of potential misrepresentation and investor protection.

Moreover, the commissioners’ perspective points toward a need for a more nuanced approach in assessing whether a particular NFT qualifies as an investment contract or not.