At long last, the U.S. Securities and Exchange Commission (SEC) has officially taken (and settled) its first-ever NFT enforcement action against LA-based entertainment company, Impact Theory.
According to the SEC’s press release issued on August 28, Impact Theory violated federal securities laws by offering and selling three tiers of NFTs that generated $30 million from hundreds of investors across the U.S. – without registering them.
Impact Theory’s Three Tiers of NFTs
The SEC’s Order stated that from October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as “Founder’s Keys” – Legendary, Heroic, and Relentless.
As part of the offering, Impact Theory reportedly encouraged potential investors to consider their purchase of a Founder’s Key an investment into a business it was building that it described as “the next Disney.”
The SEC believed that these NFTs, as marketed and promoted, were considered “investment contracts” under the Howey Test, and therefore, violated federal securities laws and an unregistered security offering.
Are NFTs Securities?
The golden question which continues to haunt investors still has regulators and lawmakers going back-and-forth as they painstakingly are working to determine which regulatory body – SEC or CFTC – should govern the regulation of digital assets and the parameters in which both bodies would operate within.
While most digital assets are treated as “securities,” there is still a required analysis that doesn’t make that question black-and-white – and it centers around the “investment contract” element of the Howey Test –
(1) was there an investment of money?
(2) was it invested into a “common enterprise?”
(3) was there an “expectation of profits” that would be derived from the efforts of the promoter or a third party?
Regardless of that analysis, previous enforcement decisions haven’t clarified the specific criteria or focal points in which the watchdog concentrated its analysis on.
The Settlement
While Impact Theory did not admit nor deny the charges, it did agree to a cease-and-desist order, in addition to agreeing to pay penalties that totaled around $6.1 million, which included disgorged profits and royalties.
As part of the settlement, the company also agreed to (1) publish the SEC’s order on its company website and social media channels, as well as (2) destroy all of the Founder’s Keys NFTs it had within its control.
The biggest takeaway here is that the SEC was able to determine that these were unregistered securities offerings because of how the Founder’s Keys NFTs were positioned – an investment opportunity where investors’ funds would be directly allocated towards the development and creation of a future intellectual property franchise for commercial entertainment.
For example, the Order referenced a number of statements from Impact Theory representatives, repasted below:
Does an NFT offering have to generate “dividends?”
Another interesting question that hasn’t yet been addressed in this or previous SEC enforcement actions, is whether an NFT offering must generate “dividends” in order to be considered an actual “promise” that would essentially form an “investment contract?”
Two SEC commissioners – Hester Pierce and Mark Uyeda – dissented with the SEC’s enforcement action, expressing their belief that the NFTs in question – the Founder’s Keys – did not generate dividends for their holders, because of that, couldn’t amount to actual “promises” that were made in statements by Impact Theory and its investors.
On August 23, the U.S. Department of Justice (DOJ) sentenced OpenSea’s former product manager, Nathan Chastain, to three months in prison (and more) in what it called the “first-ever digital asset insider trading scheme.” This is also the result of the SEC’s strengthening of its in-house crypto assets and cyber enforcement division, which is prioritizing the illicit usage of crypto and digital collectibles.
Source: nft now
