NFTs In Legal Crossroads: SEC Lawsuit Questions Securities Status

In a significant move underscoring the evolving regulatory landscape surrounding cryptocurrencies, the US Securities and Exchange Commission (SEC) has turned its attention to the Non-Fungible Tokens (NFTs) market, initiating legal action against media and entertainment company Impact Theory.

The SEC alleges that Impact Theory conducted an unregistered offering of crypto asset securities as Non-Fungible Tokens, raising approximately $30 million from hundreds of investors, including those across the United States.

Impact Theory Faces SEC Lawsuit Over Unregistered NFTs Offering

According to the SEC’s order, Impact Theory introduced three tiers of NFTs, known as Founder’s Keys, labeled as “Legendary,” “Heroic,” and “Relentless,” between October and December 2021. 

The order reveals that Impact Theory actively promoted the “Founder’s Keys” as an investment opportunity, suggesting that investors stood to profit if the company achieved its goals. 

With comparisons to building “the next Disney” and promising substantial value to purchasers, Impact Theory allegedly positioned the NFTs as a potentially lucrative venture. The SEC, however, determined that these NFTs constituted investment contracts and thus fell under the definition of securities.

Per the SEC’s announcement, Impact Theory violated federal securities laws by offering and selling these “crypto asset securities” without proper registration or exemption. 

Antonia Apps, Director of the SEC’s New York Regional Office, emphasized the importance of NFT registration, stating:

Absent a valid exemption, offerings of securities, in whatever form, must be registered… 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. 

Impact Theory has agreed to a cease-and-desist order without admitting or denying the SEC’s findings. The company has been ordered to pay over $6.1 million in disgorgement, prejudgment interest, and civil penalties. 

A Fair Fund will also be established to reimburse investors for the amounts they paid to acquire the NFTs. Impact Theory will destroy all Founder’s Keys, publish the SEC’s order on its websites and social media channels, and waive any royalties previously entitled from future secondary market transactions involving the Founder’s Keys.

Overall,  the recent enforcement action taken by the SEC against Impact Theory for its allegedly “unregistered NFT offering” marks a significant development in the regulatory landscape surrounding the crypto industry. 

The implications of this lawsuit extend beyond Impact Theory, as it raises crucial questions about the legal status of NFTs and the responsibilities of market participants. 

What is certain, is that the outcome of this case could set a precedent for future regulations and shape the trajectory of the Non-Fungible Token market as a whole.

Featured image from iStock, chart from TradingView.com