The Securities and Exchange Commission (SEC) has charged LA-based media and entertainment company Impact Theory with conducting an unregistered offering of crypto assets in the form of non-fungible tokens (NFTs). According to an official press release from the SEC, the company raised approximately $30 million from hundreds of investors through their offering, violating federal securities laws.
The regulatory landscape surrounding NFTs is of increasing interest to the SEC. If CryptoStores As reported in March 2022, the SEC had begun investigating NFT marketplaces and makers for potential violations of its securities rules. The main focus was on the use of fractionated NFTs, which was seen as a way to sell unregistered securities. Now, the SEC’s charges against Impact Theory appear to be a concrete expression of these regulatory concerns.
As the SEC order indicates, from October to December 2021, Impact Theory sold three tiers of NFTs, dubbed “Founder’s Keys,” including the “Legendary,” “Heroic,” and “Relentless” tiers. The company projected the purchase of a Founder’s Key as an investment in the company and emphasized its ambition to “build the next Disney.” However, the SEC determined that these NFTs, which were marketed to investors as investment contracts, were securities. Without a valid exemption, the offering of such securities must be registered, providing investors with the necessary disclosures and safeguards.
The regulatory approach of treating NFTs as securities contrasts with the position of some European regulators. For example, the German financial supervisory authority, BaFin, stated in March 2023 that NFCs do not qualify as securities. Despite the differing regulatory perspectives, it is clear that the classification and regulation of NFTs and other crypto-assets worldwide will continue to be a challenging issue.
In accepting the SEC’s findings, Impact Theory agreed to measures including a cease and desist order, paying more than $6.1 million in fines and interest, and establishing a Fair Fund to return the money to investors. They also agreed to eliminate future royalties from secondary market transactions involving the Founder’s Keys.