In an enforcement case made public on Monday, August 29, Securities and Exchange Commission (SEC) accused Los Angeles-based entertainment firm Impact Theory of executing an unregistered offering of securities using non-fungible tokens, or NFTs.
The lawsuit creates a new precedent by concluding that NFTs are subject to the agency’s authority as the SEC broadens its definition of which forms of crypto assets qualify as securities.
Without a valid exemption, all securities offerings, no matter the format, must be registered, per Antonia Apps, SEC’s New York Regional Office director.
It has been up for debate for a while now whether NFTs count as securities. Before the SEC intervened, a lawsuit filed in the Southern District of New York District Court by a collection of NFT collectors against Dapper Labs continued to be the most well-known case to address the problem.
According to the plaintiffs, the crypto company sold unregistered securities for hundreds of millions of dollars.
Dapper Labs requested that the case be dismissed last year, but a judge said in February that it could proceed since it was “plausible” that NFTs may be considered securities.
According to a spokeswoman for Dapper, “Courts have repeatedly found that consumer goods—including art and collectibles like basketball cards—are not securities under federal law.” Dapper maintains its contrary position.
The judge observed that conventional collectible value remains unaffected by producer closure. NFTs, however, tie value to business success when developers control the underlying blockchain technology.
In the action from Monday , the SEC stated that Impact Theory offered three tiers of NFTs, known as Founder’s Keys, between October and December 2021. It also encouraged buyers to regard the purchase as an investment in the company.
The SEC claims that Impact Theory claimed it was “trying to build the next Disney” and that if the venture was successful, the NFTs would offer buyers “tremendous value.”
The SEC includes public statements made by the company’s founders in a different sequence. In reference to the NFTs, the business said : “We like to say that it unlocks the future of everything that we’re doing as a company.” This looks like a subliminal admission that the product was viewed by the agency as a security or investment contract.
Impact Theory raised close to $30 million in Ethereum by selling over 14,000 NFTs to numerous investors.
Impact Theory accepts cease-and-desist, pays $6.1 million fine, and will reimburse NFT investors. However, it neither confirms nor rejects SEC’s charges.
SEC hasn’t launched any legal action against major NFT players like Dapper Labs. It leaves uncertainty if this marks first action against larger NFT business.
Although the SEC has not yet filed any charges, in October 2022 the agency attempted to establish whether Yuga Labs, the company behind the well-known Bored Ape Yacht Club NFT collection, was marketing unregistered securities.
The larger crypto industry routinely criticizes SEC Chair Gary Gensler for following a policy of “regulation by enforcement”. It accuses it of suing businesses without establishing rules to define the agency’s authority or the compliance requirements.
According to Gensler, the business is “rife with fraud, scams, and abuse,” and the current regulations are enough.
CEO of Impact Theory Tom Bilyeu disclosed that the company and the SEC had reached a settlement, ending the inquiry.
The latest executive statement regrets SEC’s broad inquiry into tech innovations enabling digital assets via securities laws’ perspective. Still, the company maintains hope for the sector’s national future.