One question that has plagued the blockchain space for years has to do with the status of its assets. From cryptos to NFTs, there is a lot of interest in what they are. Are they certainties? Is it utilities? Something in between? One organization that is very interested is the Securities and Exchange Commission (SEC) in the United States. The SEC has gone after crypto projects, crypto exchanges, non-crypto companies that have issued tokens, and now NFTs. Notably, the SEC secured a legal victory over an LA-based entertainment company called Impact Theory. The case obviously had to do with the perceived legal status of an NFT project.
What happened to impact theory
The Impact Theory saga started in 2021 when the media company started offering NFTs for sale. The asset, called KeyNFT, could potentially allow users to receive a share of Impact Theory’s profits in the future. There were three levels of investment: ‘Legendary’, ‘Heroic’ and ‘Ruthless’, and the company reportedly raised $30 million from the sale of the NFTs.
Unfortunately, this landed them in trouble with the SEC. The argument put forward was that by using the NFTs as a way to distribute future profits and raise funds, Impact Theory had been selling unregistered securities.
“The order shows that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory has violated federal securities laws by offering and selling these crypto-asset securities to the public in an unregistered offering that was not otherwise exempt from registration,” a rack from the SEC, as the commission charged the company for this act.
Impact Theory has neither confirmed nor denied these allegations, but has taken some steps to rectify them. The company agreed to a cease and desist order, paid a $6.1 million fine, established a fund to repay investors, destroyed all NFTs still under its control, and eliminated any royalties it might receive from the secondary sale of the NFTs.
Why is this important?
This case is a landmark case as it is the first case of NFT enforcement by the SEC. The committee has worked with everyone from Coinbase to Ripple Labs over the years, but NFTs had previously been spared that treatment. However, this case sets a precedent that could affect some NFT projects in the future.
When it comes to crypto, the debate over its legal status often stems from the financial benefits users can get from it. This is where the argument always comes up about what makes a crypto a utility token versus an investment. Many crypto products are advertised using the selling point of future profits to entice investors.
In contrast, while most NFTs tend to emphasize other things, such as rarity and usefulness, many have also offered a share of future profits to buyers. So far there hasn’t been much prosecution, but this could very well change. The SEC’s statement made it very clear that the point was not that NFTs were being sold, but that they essentially symbolized future earnings shares, which is dangerously close to a security.
This means that an entire class of NFTs can be subjected to the same treatment. NFT collections that are really just works of art, NFTs for in-game use, and NFTs that unlock prizes and special experiences are unlikely to face a cease and desist order from the SEC any time soon. However, the NFTs that are sold to raise funds for upcoming projects and promise a share of the profits in return may soon be in trouble.
So what to do in that case? Projects that have issued NFTs with the prospect of future profits would likely seek legal advice. Depending on their unique situation, a course correction that would move their NFTs from potential investments to utilities may be best.
Impact Theory itself has understood the message like founder Tom Bilyeu announced on Twitter that new NFTs will be released, and unlike the NFTs flagged by the SEC, will be purely utilitarian. This protects the company from any future legal trouble, but also ensures that it can continue to release NFTs.
Will be live in Discord later to answer questions. @impact_theory is pleased to announce that we have reached a settlement with the US Securities and Exchange Commission in which we have resolved the SEC’s investigation. We’re glad we’ve completed the SEC’s investigation, so…
— Tom Bilyeu (@TomBilyeu) August 28, 2023
Future NFT Legislation
For years, it seemed that NFTs were not at all on the SEC’s radar or safe from SEC legal action. This case is the first, but probably won’t be the last. As regulators catch up with developments in the SEC industry, the line between digital collectibles and unregistered assets will be drawn and it will be up to stakeholders to adapt to these developments.
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*All investment/financial opinions expressed by NFT Plazas are the result of the personal research and experience of our site moderators and are for educational purposes only. Individuals are required to fully research each product before making any kind of investment.