The SEC’s Enforcement Action on NFTs
The U.S. Securities and Exchange Commission (SEC) has taken another step in regulating the cryptocurrency market by charging Impact Theory, a media and entertainment company, with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs).
Impact Theory raised approximately $30 million from hundreds of investors through the offering of three tiers of NFTs called Founder’s Keys. The SEC determined that these NFTs were investment contracts and therefore securities, which violated federal securities laws.
The Consequences for Impact Theory
As a result of the charges, Impact Theory has agreed to a cease-and-desist order and will pay over $6.1 million in disgorgement, prejudgment interest, and civil penalties. Additionally, the company will establish a Fair Fund to return the money paid by investors to purchase the NFTs. They will also destroy all Founder’s Keys in their possession, eliminate any royalty from future secondary market transactions, and publish notice of the order on their websites and social media channels.
SEC Commissioners’ Dissenting Opinion
SEC Commissioners Hester Peirce and Mark Uyeda expressed their dissent from the decision, stating that the application of the Howey analysis was inappropriate in this case. They believe that the Commission should have grappled with the larger questions surrounding NFTs before bringing this enforcement action.
Peirce and Uyeda acknowledged the concerns about the hype surrounding NFTs and the potential for investors to spend large sums of money without a clear understanding of how they will benefit from the purchase. However, they argued that the statements made by Impact Theory did not form an investment contract and that a rescission offer would have been a more appropriate response to the registration violation.
The Future of NFT Regulation
The SEC’s ruling provides some clarity on the regulation of NFTs, but many questions remain. NFTs are a new asset class that can give owners various rights to digital or physical assets. The Commissioners suggested that the SEC should categorize NFTs in useful ways to determine how securities laws apply to offers and sales.
Emil Åkesson, founding partner and Chair at CLC Partners, believes that this ruling shows that NFTs can be classified as securities depending on their setup. He emphasized the importance for companies to consult with legal experts, review their marketing language, consider registration with the SEC, and provide investor education to ensure compliance with securities laws.
