The U.S. Securities and Exchange Commission (SEC) has leveled charges against a Los Angeles-based media and entertainment company for conducting unregistered securities sales by offering non-fungible tokens (NFTs) to investors between October and December 2021.
Impact Theory, a firm specializing in educational and entertainment content, including various podcasts, allegedly raised nearly $30 million through the sale of NFTs called “Founder’s Keys,” offered at three different tiers. According to the SEC, the company “encouraged potential investors to view the purchase of a Founder’s Key as an investment in the business,” stating:
“Impact Theory emphasized that it was ‘trying to build the next Disney’ and that, if successful, it would provide ‘tremendous value’ to Founder’s Key buyers.” The SEC determined that the NFTs were investment contracts and thus securities, and the company violated the Securities Act of 1933 by selling them without registration. A cease-and-desist order has been issued, which Impact Theory has accepted.
Per the SEC’s order, the company is required to pay a total of over $6.1 million in restitution, pre-trial interest, and a civil penalty, without admitting or denying the agency’s findings. Additionally, a fund will be established to return money to investors in the Founder’s Key NFTs. Impact Theory will destroy all Founder’s Keys in its possession or control, post a notice of the order on its websites and social media channels, and will not receive royalties from future sales of the NFTs on the secondary market. According to NFT Stats, a top-tier “Legendaio” Founder’s Key NFT sold two days ago for $1,468 as one of the ten sales in the last week. The token supply is 13,572, with 4,620 owners. Founder’s Key is just one of the NFT series offered by the company. They did not respond to a query from Cointelegraph at the time of publication. This was the SEC’s first enforcement action involving NFTs, according to SEC commissioners Hester Peirce and Mark Uyeda, who dissented from the action. “NFTs were not shares of a company and did not generate any kind of dividend for the buyers,” they wrote, adding:
“We share our colleagues’ concern about the kind of hype that leads people to spend nearly $30 million on NFTs seemingly without having a clear idea of how they will use, enjoy, or benefit from them. […] However, this legitimate concern is not a sufficient basis to bring the matter within our jurisdiction.” The promises made by Impact Theory and cited in the SEC’s order “are not the kind of promises that form an investment contract.” The commissioners compared the promises made about the NFTs to statements made by sellers of collectibles. They then suggested a list of nine questions that the agency should consider before pursuing NFT cases:
“Regardless of what one thinks of the Howey analysis, this matter raises broader issues that the Commission must grapple with before bringing additional cases on NFTs.”