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SEC Shakes NFT Market by Charging Impact Theory NFT Project with Securities Law Violations

The watchdog charged NFT company Impact Theory’s project called "Founder’s Keys" which was released in late 2021.

TheSEC has targeted the NFT market with after securities law violation.
Creator: Andrew Harrer Credit: Bloomberg Copyright: © 2019 Bloomberg Finance LP

WASHINGTON D.C. – The U.S. Securities and Exchange Commission (SEC) has initiated an inaugural enforcement action targeting Los Angeles-based media and entertainment company Impact Theory. The NFT project in question is called "Founder’s Keys", which was launched in late 2021 and raised approximately $30 million from hundreds of investors.


Impact Theory NFT Project


The SEC contends that the NFTs offered by Impact Theory constituted investment contracts, effectively classifying them as securities and thereby violating securities regulations. The agency's enforcement is based on its assertion that Impact Theory enticed potential investors to view their NFT purchases as investments in the company's success, creating expectations of profits.


As a result of the charges, Impact Theory has agreed to a cease-and-desist order, accompanied by a financial settlement totaling over $6.1 million. This settlement includes disgorgement, prejudgment interest, and a civil penalty.


While Impact Theory neither admitted nor denied the SEC's allegations, it has undertaken significant steps to remedy the situation. The company will destroy any of its owned Founder's Keys NFTs, eliminate potential royalties from secondary markets, and redefine its digital assets as "collectibles with utility." Co-founder Tom Bilyeu emphasized that the company will now vehemently discourage any misrepresentation of these assets.


Significance of the Action


This landmark case has drawn attention from within the SEC itself, as commissioners Hester Peirce and Mark Uyeda issued a dissenting statement. They raised concerns about the SEC's reliance on the Howey test, a decades-old framework designed to determine whether certain assets qualify as investment contracts. The commissioners argued that NFTs do not resemble shares of a company and do not generate dividends, drawing a distinction between these digital assets and traditional securities.


This enforcement action marks a significant turning point in the world of NFTs, signaling the SEC's intent to apply existing securities laws to this rapidly expanding market. With lawsuits against major crypto firms like Binance, Coinbase, and Ripple Labs for allegedly offering unregistered securities, the Impact Theory case signifies a new approach for the SEC.


As this regulatory landscape evolves, industry experts are predicting the potential for increased charges against NFT projects, leading to short-term price volatility as traders seek to navigate uncertain terrain.


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