SEC charges Impact Theory for ‘unregistered NFT offering,’ expanding enforcement actions to NFT market

The Securities and Exchange Commission (SEC) charged LA-based media and entertainment firm Impact Theory with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). According to an official press release by the SEC, the company raised approximately $30 million from hundreds of investors through their offering, violating federal securities laws.

The regulatory landscape around NFTs has been of increasing interest to the SEC. As  CryptoSlate reported in March 2022, the SEC had begun investigating NFT marketplaces and creators for possible breaches of its securities rules. The focus was mainly on the use of fractionalized NFTs, which was seen as a way to sell unregistered securities. Now, the SEC’s charges against Impact Theory appear to be a concrete manifestation of those regulatory concerns.

As the SEC order details, Impact Theory sold three tiers of NFTs, named “Founder’s Keys,” from October to December 2021. They included “Legendary,” “Heroic,” and “Relentless” tiers. The company projected the purchase of a Founder’s Key as an investment into the business, emphasizing its ambition to “build the next Disney.” However, the SEC has found that these NFTs, marketed to investors as investment contracts, were securities. Without a valid exemption, offering such securities must be registered, providing investors with necessary disclosures and safeguards.

The regulatory approach of treating NFTs as securities contrasts with the stance of some European regulators. For instance, the German Financial Supervisory Authority, BaFin, declared in March 2023 that NFTs do not qualify as securities. Despite the varied regulatory perspectives, it’s clear that the classification and regulation of NFTs and other crypto assets will remain a challenging issue globally.

On accepting the SEC’s findings, Impact Theory agreed to measures including a cease-and-desist order, paying over $6.1 million in penalties and interest, and establishing a Fair Fund to return the money to investors. They also agreed to eliminate any future royalty from secondary market transactions involving the Founder’s Keys.