On Monday, the US Securities and Exchange Commission (SEC) charged Los Angeles-based media and entertainment company Impact Theory, LLC with offering and touting investment potential of their Founder’s Key NFTs. Impact Theory is accused of violating securities laws by selling unregistered securities in the form of NFTs.
According to the SEC, Impact Theory raised over $30 million through the sale of NFTs, including from investors in the United States. The company allegedly promoted the NFTs as investment contracts, emphasizing that if successful, Impact Theory would deliver “tremendous value” to Founder’s Key purchasers. This characterization of the NFTs as investment opportunities makes them securities under federal securities laws, which requires registration with the SEC.
As part of the settlement, Impact Theory neither denied nor agreed to the charges, but agreed to pay a fine of over $6.1 million. The company also accepted a cease-and-desist order, which requires them to refund affected investors and destroy all the NFTs. Impact Theory has also agreed to publish notice of the SEC order on its websites and social media channels, and eliminate any future royalties from secondary market transactions involving the Founder’s Keys.
This SEC action against Impact Theory marks the first enforcement action specifically targeting NFTs. However, it is part of a series of enforcement actions and settlements by the SEC in recent months, including lawsuits against major crypto exchanges Binance and Coinbase.
It is worth noting that the SEC recently suffered a setback in a legal case involving the cryptocurrency XRP when a US judge ruled that XRP is not a security. The SEC has filed a motion seeking an interlocutory appeal in that case.
Overall, the SEC’s charges against Impact Theory highlight the increasing scrutiny and regulation of the NFT market. Market participants, including media companies and creators, should be aware of the potential legal implications when offering NFTs that may be considered securities.