SEC's landmark move: First enforcement action targets unregistered NFT project

In a significant move, the U.S. Securities and Exchange Commission (SEC) has announced its inaugural enforcement action against a non-fungible token (NFT) project for operating as unregistered securities. The case was resolved with Impact Theory, the issuer of these NFTs, which agreed to a series of penalties.

Impact Theory settles with SEC

The SEC's action centered on NFTs issued by Impact Theory, which the regulatory body deemed unlicensed securities. Impact Theory opted to settle the case, accepting a cease-and-desist order, payment of $6.1 million in penalties, and the commitment to destroy all remaining NFTs within their control. Furthermore, the company will waive any royalties derived from secondary market NFT sales.

The Founder's Keys & marketing practices

Impact Theory's NFTs, known as "Founder's Keys," were sold in three tiers in 2021. The SEC complaint highlights that the company marketed these NFTs as investments into its business, suggesting that investors would profit from their purchases if the company succeeded in its endeavors. Impact Theory drew parallels, likening itself to the early days of Disney and implying that owning a Legendary tier NFT was akin to investing in "Steamboat Willie."

SEC's stance on NFTs as securities

This enforcement action raises questions about whether the SEC broadly categorises NFTs as securities offerings. The focus of the complaint was on the marketing tactics and the stated use of proceeds rather than the nature of the NFTs themselves. Some NFT projects, like NBA Top Shot, maintain that their products are collectibles and not investments designed to build intellectual property for entertainment companies.

However, two SEC commissioners, Hester Peirce and Mark Uyeda, dissented from the action, arguing that the statements cited in the order did not constitute the promises typically associated with investment contracts. They also pointed out the need for guidance on how to classify NFTs within the asset class.

Hermine Wong, former head of policy at Coinbase and a former SEC regulator mentioned that the above move underscored the SEC's strategy in the crypto space, extending its jurisdiction to encompass anything crypto-related.

The broader regulatory landscape for cryptocurrencies and related assets remains uncertain, with questions about who has regulatory authority. NFTs, a subset of the crypto realm, gained popularity in 2021, offering a wide range of functions, from access to exclusive chatrooms to a means of establishing value for digital art, sometimes providing royalties to artists upon resale.