In a first for the U.S. Securities and Exchange Commission, the regulator has charged Los Angeles-based media company Impact Theory with violating U.S. securities laws over the unregistered offering of NFTs. The company settled the enforcement action, which included $6.1 million in disgorgement and penalties.
The SEC found that Impact Theory had encouraged potential investors to view the purchase of NFTs sold and offered by the company—which were called ‘Founder’s Keys’—as an investment into the business, claiming that investors would profit from their purchases if Impact Theory was successful in its efforts.
This ticked a key box of the Howey test, a long-standing legal precedent that establishes whether a given asset offering amounts to an investment contract under U.S. securities law. Under the Howey Test, an asset would qualify as a security if there is:
– An investment of money;
– In a common enterprise;
– With a reasonable expectation of profits based upon the efforts of others.
The SEC charges against Impact Theory may signal a new effort by the agency to bring the NFT market within its jurisdiction.
“Absent a valid exemption, offerings of securities, in whatever form, must be registered,” Antonia Apps, Director of the SEC’s New York Regional Office, said. “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.”
As part of the settlement, Impact Theory agreed to a cease-and-desist order finding that it violated registration provisions of the Securities Act of 1933 and ordering it to pay more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty without admitting or denying the SEC’s findings. The order also established a ‘Fair Fund’ to return funds that injured investors paid to purchase the NFTs, and the company agreed to destroy all Founder’s Keys in its possession.
The SEC’s decision to charge Impact Theory wasn’t without opposition, including from within the agency, as two commissioners issued a written dissent to the settlement and encouraged the SEC to provide the market with better guidance on NFT regulation.
Commissioners Hester Peirce and Mark Uyeda dissented to the application of the Howey test to the NFTs, stating that there was “not a sufficient basis to pull the matter into [the SEC’s] jurisdiction.”
Peirce and Uyeda argued that “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.”
The dissenting commissioners also noted that the charges “raise[d] many difficult questions.”
The conflicting opinion within the SEC shows the difficulty the agency has in the uncertain U.S. climate, where even within the regulator’s ranks, there is no unanimous agreement on its jurisdictional reach and how best to enforce securities law.
Watch: SEC Commissioner Hester Peirce on Blockchain Policy Matters
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