The US Securities and Exchange Commission (SEC) has charged Impact Theory of selling unregistered offerings of non-fungible tokens (NFTs), marking the commission’s first action against a player in the NFT market.
The SEC alleged that the Los Angeles-based media company sold approximately $30 million of unregistered crypto asset securities. Impact Theory was also accused of promoting the potential value appreciation of the NFTs.
A cease-and-desist order was agreed to by Impact Theory. The media company also agreed to pay $6.1 million in penalties, and destroy all of the NFTs still in its control.
Charges against Impact Theory
The commission alleged that these keys were promoted as an investment into the business, “stating that investors would profit from their purchases if Impact Theory was successful in its efforts”. However, the NFTs were not tokenised versions of company shares and there was no dividend for the buyers.
As part of this promotion, Impact Theory claimed it was “trying to build the next Disney” and could deliver “tremendous value” to NFT holders.
The SEC press release said: “Impact Theory violated the 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.”
As well as financial penalties and destroying their NFTs, Impact Theory said it would eliminate any royalties from NFT sales on secondary markets.
Antonia Apps, Director of the SEC’s New York Regional Office, said: “Without registration, investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.”
SEC dissent over Impact Theory charges
The charges against Impact Theory were not unanimous from all at the SEC. Commissioners Hester Peirce and Mark Uyeda wrote a letter disagreeing with the decision.
The letter said: “The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract.
“We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.”
The commissioners argued that the claims made by Impact Theory did not constitute an investment contract, especially as no dividend or company share was offered.
Future implications of this decision were also raised as concerns in the letter. “Because it is the first NFT settlement, this enforcement action raises many difficult questions. The Commission should have grappled with these questions long ago and offered guidance when NFTs first started proliferating.”
A series of questions were listed, including guidance for NFT buyers and whether recent crypto legislation should be applied to the tokens.
SEC’s new focus on NFTs
The SEC increased its crypto assets and cyber enforcement task force in May 2022, with NFTs as a specific area of investigation for the regulators.
Soon afterwards, the former OpenSea product manager Nathaniel Chastain was charged and arrested for wire fraud and money laundering. He was accused of insider trading when buying NFTs before they were brought to the OpenSea exchange’s front page.
He sold them at “at profits of two-to-five-times his initial purchase price”, according to the arrest announcement.
However, the regulation of NFT projects is an area that the SEC has not delved into before this Impact Theory case. It is unclear how this will affect similar projects and whether the commission’s approach will differ compared to cryptocurrencies.