On August 28, 2023, Impact Theory, LLC, a Los Angeles media and entertainment company, was charged by the Securities and Exchange Commission (SEC) for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). NFT stands for non-fungible token. It is a unique digital asset that represents ownership of a digital item like artwork, music, videos, etc. The SEC alleges that Impact Theory raised approximately $30 million from hundreds of investors, including investors across the United States.

According to the SEC’s order, Impact Theory offered and sold three tiers of NFTs called Founder’s Keys from October to December 2021. These tiers were labeled as “Legendary,” “Heroic,” and “Relentless.” Impact Theory marketed the purchase of these NFTs as an investment into the company, suggesting that investors would profit from their purchases if Impact Theory succeeded in its endeavors. The company emphasized its goal of becoming the next Disney and claimed that if successful, the Founder’s Key purchasers would experience significant value. The SEC determined that these NFTs were, in fact, investment contracts and therefore qualified as securities. As a result, Impact Theory violated federal securities laws by offering and selling these crypto asset securities to the public without proper registration or exemption.

Antonia Apps, the Director of the SEC’s New York Regional Office, stated that offerings of securities must be registered unless a valid exemption applies. By failing to register the offering, Impact Theory deprived investors of the protections provided by securities laws, including robust disclosures and other safeguards. It should be noted, however, that two commissioners dissented questioning if this case warranted an enforcement action since the typical remedy is a rescission offer, which the company already provided. Moreover, they believe the commission should have provided guidance on NFTs earlier and raised questions about categorizing NFTs, tailoring registration requirements, secondary market implications, destroying unique NFT art, and eliminating royalties.

The dissenters believe the commission should provide specific guidance to NFT issuers on how to comply if it views past NFTs as securities and expressed concern that regulating NFTs under securities laws may not be the right framework and other approaches may be more appropriate to protect investors.

Without admitting or denying the SEC’s findings, Impact Theory has agreed to a cease-and-desist order. The order acknowledges that Impact Theory violated the registration provisions of the Securities Act of 1933 and requires the company to pay over $6.1 million in disgorgement, prejudgment interest, and a civil penalty. Additionally, a Fair Fund will be established to return the funds paid by injured investors to purchase the NFTs. A Fair Fund is a fund set up by the SEC to distribute money collected from enforcement actions to harmed investors. Impact Theory is also obligated to destroy all Founder’s Keys in its possession or control, publish notice of the order on its websites and social media channels, and waive any royalties it might receive from future secondary market transactions involving the Founder’s Keys.