The U.S. Securities and Exchange Commission takes unprecedented legal action against an NFT project, "Impact Theory", sparking internal disputes and concerns for the broader NFT market.
Dive in to understand the ramifications and the SEC's stance on this evolving digital asset class.
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The SEC Questions the Way NFTs Were Sold to Investors
On August 28, 2023, the U.S. Securities and Exchange Commission (SEC) announced that they have charged Los Angeles-based media and entertainment company "Impact Theory" for selling an unregistered security called "Founder's Keys" as an NFT.
While the SEC has previously charged various cryptocurrency-related companies, this marks the first instance of an NFT project being accused of unregistered securities sales.
According to official statements, from October to December 2021, Impact Theory sold its NFTs to several hundred investors, raising an estimated total of around $30 million.
The SEC criticized Impact Theory for promoting the purchase of the "Founder's Keys" NFTs as an investment in their business, implying that if the company succeeded, NFT buyers would reap financial benefits.
Specifically, advertisements claimed that "Impact Theory is on its way to becoming the next Disney, and if successful, NFT buyers would gain significant value."
Hence, Founder's Keys were deemed as securities.
Impact Theory Agrees to Pay Penalties
The SEC's announcement also mentioned, "Without admitting or denying the findings, Impact Theory has agreed to disgorge over $6.1 million in ill-gotten gains, prejudgment interest, and civil penalties."
It was further stated that the SEC's order requires the establishment of a fund to refund NFT purchasers. Impact Theory has also agreed to:
- Destroy all "Founder's Keys" they manage and possess.
- Publicize this order on their website and social media channels.
- Refrain from receiving potential royalties from secondary market trades related to the Founder's Keys.
Dissenting Opinions Within the SEC
The SEC's first legal action against an NFT has raised concerns over the possibility of other NFT projects facing similar charges.
However, there are dissenting opinions within the SEC itself regarding this decision.
Commissioners Hester Peirce, known as "Crypto Mom", and Mark Weida released statements indicating,
"This case presents significant issues the SEC should have addressed before bringing another NFT enforcement action."
While both commissioners acknowledged concerns over Impact Theory's promotional activities, they opined that these concerns alone don't warrant bringing the issue under the SEC's jurisdiction.
They further explained that statements made by the cited companies or NFT purchasers do not form the kind of promises that establish an investment contract.
The commissioners drew comparisons with collectibles like watches and paintings, which can appreciate in resale value as a brand gains popularity, yet the SEC doesn't litigate such cases.
Commissioners Peirce and Weida noted, "Given that this is the first enforcement action concerning NFTs, it raises many challenging questions," and added, "The Commission should have provided guidance when NFTs started to gain traction."