Finally, the US Securities and Exchange Commission (SEC) has officially taken (and settled) its first-ever NFT enforcement action against LA-based entertainment company Impact Theory.
According to the SEC’s August 28 press release, Impact Theory violated federal securities laws by offering and selling three tiers of NFTs that raised $30 million from hundreds of US investors — without registering them.
The Three Levels of NFTs from Impact Theory
The SEC’s decision stated that from October to December 2021, Impact Theory offered and sold three levels of NFTs known as “Founder’s Keys” – Legendary, Heroic, And Merciless.
As part of the offering, Impact Theory reportedly encouraged potential investors to view the purchase of a Founder’s Key as an investment in a company it was building, describing it as “the next Disney.”
The SEC held that these NFTs, as marketed and promoted, were considered “investment contracts” under the law How Test therefore violated federal securities laws and an unregistered securities offering.
Are NFTs Securities?
The golden question that continues to haunt investors continues to have regulators and legislators going back and forth as they painstakingly work to determine which regulatory agency – SEC or CFTC – should govern digital asset regulation and the parameters in which both agencies should to operate. inside.
While most digital assets are treated as “securities,” there is still a required analysis that doesn’t black-and-white this question – and it revolves around the “investment contract” element of the Howey test –
(1) Was there a money investment?
(2) was it invested in a ‘joint venture?’
(3) was there an “expectation of profit” that would result from the efforts of the promoter or a third party?
Regardless of this analysis, previous enforcement decisions have not clarified the specific criteria or concerns the watchdog focused on.
The settlement
While Impact Theory did not admit or deny the allegations, it did agree to a cease and desist order, in addition to paying fines totaling approximately $6.1 million, including lost profits and royalties.
As part of the settlement, the company also agreed (1) publishes the SEC’s order on its corporate website and social media channels, as well (2) destroy all Founder’s Keys NFTs under his control.
The biggest takeaway here is that the SEC was able to determine that these were unregistered securities offerings because of how the Founder’s Keys NFTs were positioned – an investment opportunity where investors’ money would be directly allocated to the development and creation of a future franchise on the field of intellectual property. for commercial entertainment.
For example, the Order referenced a number of statements made by representatives of the Impact Theory, which are reproduced below:
“Now imagine as we were building out this IP you could have joined Disney when they played Steamboat Willie, and that’s how we think of the Legendary tier. That’s how we honestly feel about this whole first drop.
“The main conclusion I want to draw you is that there is a lot of cool stuff coming up in the next 18 to 24 months. And that is ultimately only a small part of what will happen in the next five years. The reason we’re only selling during the next 18 to 24 month hype is I want you guys to be able to leverage 90 percent of the economic value of all the big things that we’re going to do in the next few years. And the only way to do that is to just sell and set the price based on what we do in the near term, and then the benefits will largely be shared by you.”
“We’re going to invest that money in development, in bringing in more teams, creating more projects and making sure we’re only delivering an obscene amount of value. Until people giggle and think they can’t believe they paid – you know – whatever level they come in and get all this value – until that’s the sentiment – we’ll just keep filling it with value.”
Should an NFT offering generate “dividends”?
Another interesting question that has not yet been addressed in this or previous SEC enforcement action is whether an NFT offering must generate “dividends” to be considered an actual “promise” that would essentially constitute an “investment contract”?
Two SEC Commissioners — Hester Pierce and Mark Uyeda — disagreed with the SEC’s enforcement action, expressing their belief that the NFTs in question — the Founder’s Keys — did not pay dividends to their holders, and therefore could not amount to actual ” promises’. which were made in statements by Impact Theory and its investors.
On Aug. 23, the U.S. Department of Justice (DOJ) sentenced former OpenSea product manager Nathan Chastain to three months in jail (and more) in what it called the “first-ever digital asset insider trading program.” This is also a result of the SEC’s strengthening of its internal crypto-assets and cyber-enforcement department, which prioritizes the illicit use of crypto and digital collectibles.