SEC Now Targets NFTs

The US Securities and Exchange Commission (SEC) has embarked on its inaugural enforcement action aimed at the non-fungible token (NFT) sector. In an announcement today, the regulatory body disclosed that it has brought charges against Impact Theory, a prominent Los Angeles-based media and entertainment company recognized for its podcast. The charges pertain to the company's alleged accumulation of approximately $30 million from numerous investors, including those in the United States. The SEC asserts that Impact Theory conducted an “unregistered” offering of crypto asset “securities.”

The SEC has stipulated that the company must remit $6.1 million as part of the settlement to address these charges. This encompassing amount encompasses a civil monetary penalty and the restitution of ill-gotten gains accompanied by interest.

Beyond the confines of the NFT realm, the SEC has been trapped in a legal clash with Ripple since December 2020. This dispute revolves around Ripple's XRP token, which the SEC contends qualifies as a securities token. In recent months, the regulatory authority has also directed its attention toward cryptocurrency exchanges, hauling Binance and Coinbase into legal proceedings due to their offerings of crypto asset “securities” on unregistered trading platforms.

However, the NFT sector is now under the regulatory spotlight. In the statement unveiled on Monday, the SEC underscored that its examination revealed that the NFTs dispensed by Impact Theory were essentially investment contracts, thus classifying them as securities.

In previous instances, the SEC argued that tokens featured on cryptocurrency exchanges should be designated as “securities,” invoking the Howey Test. This evaluation methodology determines when a financial transaction qualifies as an “investment contract,” warranting regulation as a security by the SEC. The agency has consistently asserted that transactions become securities when they endeavour to generate returns for investors.

In the fresh Impact Theory case, the SEC alleged that between October and December 2021, the media company promoted and sold three tiers of NFTs named “Founder's Keys.” These tokens were categorized as “Legendary,” “Heroic,” and “Relentless.”

“The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder's Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts,” the SEC elaborated. “Among other things, Impact Theory emphasized that it was 'trying to build the next Disney,' and, if successful, it would deliver 'tremendous value' to Founder's Key purchasers.”

Nonetheless, Impact Theory neither admitted nor denied the findings, per the SEC's statement. Nevertheless, the media company has consented to comply with the cease-and-desist order issued by the regulatory agency.

Moreover, the company has committed to disposing of all “Founder's Keys” within its possession. It will also disseminate a notification regarding the SEC's order across its website and social media platforms while relinquishing any potential royalties from future secondary market transactions related to the NFTs.

Additionally, the SEC has mandated that Impact Theory establish a “Fair Fund” to facilitate the reimbursement of investors who procured NFTs during the period the tokens were promoted.

Commenting on the matter, Antonia Apps, Director of the SEC's New York Regional Office, remarked that securities offerings must be registered. With registration, investors of all types are protected from the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.