SEC Sues Impact Theory for Unregistered Offering of NFTs

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  • Impact Theory, an LA-based media company, has been charged by the SEC for conducting an unregistered offering of crypto securities through NFTs
  • The company raised $30 million in 2021, but the SEC said it violated securities laws by NFTs without registration
  • As part of the settlement, Impact Theory has agreed to pay over $6.1 million, establish a Fair Fund for affected investors, and comply with various corrective measures.

The Securities and Exchange Commission (SEC) yesterday took its first action against an NFT issuer, laying down a marker that NFTs can be considered securities. The agency took action against Impact Theory, a prominent media and entertainment company headquartered in Los Angeles, ruling that it conducted an unregistered offering in the form NFTs, with the assets considered investment contracts. The news will no doubt alarm companies that have treated NFTs the same way, opening up a potential new pipeline for SEC enforcement action.

Founder’s Keys Were Impact Theory’s Downfall

According to the SEC’s allegations, Impact Theory raised $30 million from numerous investors in 2021, including those from various parts of the United States. The company achieved this through a series of NFT offerings that took place between October and December, with the “Founder’s Keys” were categorized into three tiers labeled as “Legendary,” “Heroic,” and “Relentless.”

The SEC’s order reveals that Impact Theory promoted the purchase of these Founder’s Keys as investments in their business endeavors. The company went so far as to suggest that those investing in these NFTs could expect to reap substantial profits if Impact Theory’s ventures proved successful. The company’s ambitious goal to become “the next Disney” was emphasized, along with promises of delivering immense value to Founder’s Key purchasers.

NFTs No Exception to Securities Laws

The SEC’s investigation concluded that the NFTs offered and sold by Impact Theory to investors were essentially investment contracts, classifying them as securities. This determination led to the accusation that Impact Theory had violated federal securities regulations by conducting an unregistered offering of the NFTs.

Antonia Apps, the Director of the SEC’s New York Regional Office, stated in a press release that NFTs were no exception to securities laws:

Offerings of securities, regardless of their form, must adhere to registration requirements unless a valid exemption is in place. Our securities laws have long provided vital protections through comprehensive disclosures and safeguards for all types of investors.

As part of the settlement, Impact Theory neither admitted nor denied the SEC’s findings, agreeing to a cease-and-desist order acknowledging its violation of registration provisions under the Securities Act of 1933. To resolve the charges, Impact Theory committed to paying over $6.1 million in total, encompassing disgorgement, prejudgment interest, and a civil penalty.

Furthermore, a Fair Fund is set to be established to facilitate the return of funds to affected investors who had purchased the NFTs. Impact Theory has committed to destroying all Founder’s Keys under its control, publicly acknowledging the SEC’s order on its official websites and social media platforms, and relinquishing any royalties it could potentially receive from future secondary market transactions involving the NFTs.