The US Securities and Exchange Commission (SEC) has taken its first enforcement action targeting the non-fungible token (NFT) industry. Today (Monday), the securities regulator announced that it has accused Impact Theory, a Los Angeles-based media and entertainment company popular for its podcast, of raising about $30 million from hundreds of investors, including those in the United States, through its “unregistered” offering of crypto asset “securities.”

SEC Charges Impact Theory over NFT Securities Sales

In a statement, the SEC stated that it has ordered the company to pay a grand total of $6.1 million to settle the charges. The grand figure includes a civil monetary penalty and return of illicit profits plus interest.

Outside of the NFT industry, since December 2020, the SEC has been in a legal tussle with Ripple, a blockchain-based payments network, over its XRP token which it claims is a securities token. However, in recent months, the securities regulator has turned its attention to crypto exchanges, dragging Binance and Coinbase to court over their crypto asset “securities” offered on “unregistered” trading platforms.

However, it appears the NFT industry is next in line. In the statement released on Monday, the regulator noted that its findings show that NFTs offered by Impact Theory were investment contracts and therefore considered securities.

In previous cases, the regulator argued that tokens listed on crypto exchanges were “securities” by citing the Howey Test. The Howey Test is a technique used to determine when a financial transaction qualifies as an 'investment contract' and should be regulated as a security handled by the SEC. The regulator has on several occasions contended that transactions are securities when they seek to generate returns for investors.

Are NFT ‘Securities’ When Sold?

In the new case against Impact Theory, the SEC alleged that the media company between October and December 2021, marketed and sold three levels of NFTs termed “Founder's Keys.” These tokens were reportedly categorized as 'Legendary', 'Heroic', and 'Relentless'.

“The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts,” the SEC explained. “Among other things, Impact Theory emphasized that it was ‘trying to build the next Disney,’ and, if successful, it would deliver ‘tremendous value’ to Founder’s Key purchasers.”

However, Impact Theory neither admitted to nor denied the findings, according to the SEC’s statement. Nonetheless, the media company agreed to the regulatory agency’s cease-and-desist order.

Furthermore, the firm has agreed to get rid of all “Founder’s Keys” in its possession. It will also publish a notice about the SEC’s order on its website and social media platforms and eliminate any royalty that it might otherwise receive from future secondary market transactions involving the NFTs.

Additionally, the SEC said that it had ordered Impact Theory to create a “Fair Fund” in order to refund investors who purchased NFTs during the period it marketed the tokens.

“Absent a valid exemption, offerings of securities, in whatever form, must be registered,” commented Antonia Apps, the Director of the SEC’s New York Regional Office. “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.”

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