The U.S. Securities and Exchange Commission (SEC) has announced its first enforcement action against a non-fungible token (NFT) issuer for conducting an unregistered securities offering. The SEC charged Impact Theory, a Los Angeles-based media and entertainment company, with selling NFTs that promised buyers a share of the company’s future profits and success.
According to the SEC’s order, Impact Theory launched its NFT project called Founder’s Key in July 2023, offering 4,444 digital tokens that represented ownership of a portion of the company’s intellectual property rights. The company marketed the NFTs as an investment opportunity, claiming that they would increase in value as Impact Theory became the next Disney.
The SEC Sets Its Claws on the NFTs
The SEC found that the NFTs met the criteria of securities under the Howey Test, which requires an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. They also found that Impact Theory failed to register its NFT offering with the SEC or qualify for an exemption from registration, violating the federal securities laws.
The SEC ordered Impact Theory to cease and desist from its unlawful conduct, pay $5 million in disgorgement, $1 million in civil penalty, and $153,000 in prejudgment interest. The company also agreed to destroy all of the Founder’s Key NFTs and refrain from paying any royalties from secondary sales.
The SEC’s action signals its intention to regulate the booming NFT market, which has seen explosive growth and innovation in recent months. NFTs, or non-fungible tokens, are digital assets that can represent a wide range of items, including art, music, sports, and gaming.
These assets are unique and their authenticity and scarcity are ensured through the use of blockchain technology. This technology allows for the creation of a secure and transparent record of ownership and transactions for each NFT.
However, the SEC warned that some NFTs may be subject to the same rules and regulations as traditional securities, depending on their characteristics and how they are marketed. The SEC urged issuers and sellers of NFTs to comply with the securities laws and consult with legal counsel before launching their projects.
The action also drew mixed reactions from the crypto community, with some applauding the regulator for protecting investors and others criticizing it for stifling innovation and creativity. Some also questioned the consistency and clarity of the SEC’s approach to crypto regulation, noting that not all NFTs are securities and that some may have legitimate artistic or cultural value.
