SEC Expands Crypto Crackdown To NFTs With First Case Against Los Angeles Entertainment Company Impact Theory

The United States Securities and Exchange Commission (SEC) has brought its first NFT-related enforcement action by accusing a Los Angeles-based media and entertainment company of offering nonfungible tokens that were actually unregistered securities.

SEC Issues First NFT Enforcement Action 

Nonfungible tokens (NFTs) have been ensnared by the Securities and Exchange Commission’s widening crypto dragnet.

The SEC charged Los Angeles-based podcasting studio Impact Theory on Monday with conducting unregistered securities sales when it sold NFTs to investors in the period between October and December 2021. This marks the regulatory agency’s inaugural enforcement action involving an NFT project.

At the crux of the case is the company’s unregistered offering of NFTs it called “Founder’s Keys,” which raked in roughly $30 million from numerous investors. The NFTs were categorized into three tiers: Legendary, Heroic, and Relentless.

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 effort,” the SEC said. 

The SEC’s review determined these offerings qualified as investment contracts, effectively marking them as securities. This means that the company should have registered their sale under the Securities Act of 1933 — something Impact Theory failed to do.

Paying Penalties And Interests

The SEC noted that Impact Theory agreed to pay a total of over $6.1 million in disgorgement, prejudgment interest, and a civil penalty, without admitting to or denying the Wall Street regulator’s findings.

Impact Theory will set up a fund to return money to investors who purchased the NFTs. Besides the financial implications, the company will also destroy any Founders Keys NFTs it currently possesses, in addition to broadcasting the SEC’s order on its website and across its social media channels, the SEC added. 

It’s worth mentioning that not everyone at the Commission is on board with the latest enforcement action. Commissioners Hester Peirce and Mark Uyeda issued a dissent, challenging the suitability of applying the Howey Test to the burgeoning crypto asset class and suggesting that the regulatory agency should have provided guidance on regulation before taking such a radical action.

“The NFTs were not shares of a company and did not generate any type of dividend for the purchasers,” Pierce and Uyeda stated, adding: “We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.” 

They acknowledged worries about the type of hype that could entice people to invest considerably in non-fungible tokens without clearly understanding their utility or potential profitability. However, they argued that these concerns alone did not justify the SEC’s mediation.

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