$6.1M SEC Fine Set Precedent for NFT Space

Impact Theory, a Los Angeles-based entertainment company, has agreed to pay the U.S. Securities and Exchange Commission (SEC) $6.1 million for selling thousands of NFTs as unregistered securities. This is the SEC’s first enforcement action in the world of non-fungible tokens.

In 2021, Impact Theory issued over 13,000 NFTs called Founder’s Keys in the form of three tiers: ‘Legendary,’ ‘Heroic,’ and ‘Relentless.’ At that time, representatives of the company told potential buyers on X and Discord that Impact Theory was “trying to build the next Disney” and that purchasing a Founder’s Key would result in “tremendous value.”

The SEC, in its investigation of Impact Theory, found that these statements constituted the selling of investment contracts — in other words, securities. As such, it issued a cease-and-desist order against the company with a fine of $6.1 million for disgorgement, prejudgment interest, and a civil penalty.

As part of the agreement, Impact Theory must also establish a Fair Fund to return money to those who had bought the NFTs, as well as destroy all Founder’s Key NFTs in its possession or control. Currently, the collection is still available for trading on OpenSea with a floor price of 0.039 ETH or $67.

Tom Bilyeu, the entrepreneur who founded Impact Theory, released a statement on X, saying that he was pleased that the company had reached a settlement with the SEC, though he is disappointed that the U.S. enforcement agency has chosen to question the “exciting technical innovations” that make digital assets possible.

The SEC said that the investigation was conducted by the New York Regional Office with assistance from the Enforcement Division’s Crypto Assets and Cyber Unit.

Two SEC Commissioners Dissent

Although the SEC’s enforcement action was settled quickly, it did not come without dissent. And the discordance was not necessarily from the NFT or crypto community: It came from inside the civil regulatory agency.

Yesterday, two SEC commissioners — Hester M. Peirce and Mark T. Uyeda — published a statement sharing their disagreement with the enforcement action. They remarked that while Impact Theory tried to generate excitement for its NFT launch by saying the tokens would increase in value, it did not necessarily meet the criteria for the Howey Test.

Notably, the NFTs were not sold as shares of the company and they did not offer any form of dividends. They remarked that the “handful of company and purchaser statements” do not constitute investment contracts and are not sufficient evidence to pull the case into the SEC’s jurisdiction.

Peirce and Uyeda also noted that the company had already offered to pay users back for purchasing the NFTs, once in December 2021 and another time in August of 2022. The commissioners noted that this first enforcement action in the NFT space raises a host of uncomfortable questions, including:

  • With so much experimentation surrounding NFTs, how will this action serve as precedence?
  • How should legislation about crypto also inform the agency’s framework of NFTs?
  • If actions result in the destroying of NFTs, what precedent will there be for unique pieces of digital art or music?

While the SEC’s action is big news, it certainly doesn’t come as a surprise for many in the space. Founders and team members often hype individuals to buy NFTs with promises of financial gain. There are also several mechanisms by which NFTs might be construed as investment contracts, notably through NFTs that yield a token that has a monetary value.

Rarity Sniper will keep a close eye on this development and report back if needed.

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