SEC Puts NFTs in Its Sights with First Enforcement Action

• NFTs are officially on the radar of the SEC.
• The regulator issued its first enforcement action.
• Some commissioners had a different opinion.

The U.S. Securities and Exchange Commission (SEC) has charged Los Angeles-based media and entertainment company Impact Theory with unregistered offering and sale of non-fungible tokens (NFTs).

The development marks the regulator’s first enforcement action against NFTs, unique digital identifiers representing ownership of collectibles such as artwork, sports memorabilia, images, videos, or any other digital asset recorded on a blockchain network.

NFTs Touted as Investments into Business

In an order dated August 28, the regulator concluded that Impact Theory’s NFTs qualify as securities since the company promised buyers that they would profit off the collectibles’ “tremendous value” once it succeeds in becoming the next Disney.

“If you’re paying 1.5 [ETH], you’re going to get some massive amount, more than that. So, no one is going to walk away saying, ‘Oh man, I don’t think I got value here.’ I’m freakishly bullish on that. I will do whatever it takes to make sure that that is true,” the company said while promoting its KeyNFTs.

Under the Howey Test, the “expectation of a profit” and the “effort of others” are typical security characteristics.

The U.S. SEC is cracking down on unregistered NFT sales! Impact Theory is facing enforcement action for promoting their Founder's Key NFT as an investment opportunity. A bold move by the authority, signaling a growing scrutiny of the NFT market. Stay compliant, folks! #SEC #NFTs

— mustafa chakmak (@Mustafachakmak) August 29, 2023

Without admitting or denying this finding, Impact Theory has agreed with the SEC to settle over $6.1 million in disgorgement, civil penalty, and prejudgment interest. The regulator directed the company to destroy all the Founder’s Keys NFTs and cease future royalties from secondary sales.  

A Split Commission?

While the SEC has been steadfast in its regulatory onslaught toward crypto, its commissioners appeared to have a dissenting opinion.

“We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items,” said Commissioners Hester Peirce and Mark Uyeda in a separate statement.

Is SEC’s enforcement doing any good to the crypto industry? Here is what Chainalysis’ Policy Head thinks:

U.S. Faces Real Threat of Crypto “Ban by Enforcement:” Chainalysis Policy Head

Read why some legal experts are questioning the SEC’s basis for security labels:

XRP Suit: Lawyer Questions SEC’s Basis for Security Label