{"id":21666,"date":"2023-08-29T02:10:58","date_gmt":"2023-08-29T02:10:58","guid":{"rendered":"https:\/\/nftandcrypto-news.com\/nft\/sec-settles-first-nft-enforcement-action-impact-theory-fined-6-1-million\/"},"modified":"2023-08-29T02:10:58","modified_gmt":"2023-08-29T02:10:58","slug":"sec-settles-first-nft-enforcement-action-impact-theory-fined-6-1-million","status":"publish","type":"post","link":"https:\/\/nftandcrypto-news.com\/nft\/sec-settles-first-nft-enforcement-action-impact-theory-fined-6-1-million\/","title":{"rendered":"SEC Settles First NFT Enforcement Action, Impact Theory Fined $6.1 Million"},"content":{"rendered":"
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At long last, the U.S. Securities and Exchange Commission (SEC) has officially taken (and settled) its first-ever NFT enforcement action against LA-based entertainment company, Impact Theory.\u00a0<\/p>\n

According to the SEC\u2019s press release issued on August 28, Impact Theory violated federal securities laws by offering and selling three tiers of NFTs that generated $30 million from hundreds of investors across the U.S. \u2013 without registering them.\u00a0<\/p>\n

Impact Theory\u2019s Three Tiers of NFTs<\/h2>\n

The SEC\u2019s Order stated that from October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as \u201cFounder\u2019s Keys\u201d \u2013 Legendary, Heroic, <\/em>and Relentless<\/em>.\u00a0<\/p>\n

As part of the offering, Impact Theory reportedly encouraged potential investors to consider their purchase of a Founder\u2019s Key an investment into a business it was building that it described as \u201cthe next Disney.\u201d\u00a0<\/p>\n

The SEC believed that these NFTs, as marketed and promoted, were considered \u201cinvestment contracts\u201d under the Howey <\/em>Test, and therefore, violated federal securities laws and an unregistered security offering.\u00a0<\/p>\n

Are NFTs Securities?<\/h2>\n

The golden question which continues to haunt investors still has regulators and lawmakers going back-and-forth as they painstakingly are working to determine which regulatory body \u2013 SEC or CFTC \u2013 should govern the regulation of digital assets and the parameters in which both bodies would operate within. <\/p>\n

While most digital assets are treated as \u201csecurities,\u201d there is still a required analysis that doesn\u2019t make that question black-and-white \u2013 and it centers around the \u201cinvestment contract\u201d element of the Howey Test<\/em> \u2013\u00a0<\/p>\n

(1) was there an investment of money?<\/strong><\/p>\n

(2) was it invested into a \u201ccommon enterprise?\u201d<\/strong><\/p>\n

(3) was there an \u201cexpectation of profits\u201d that would be derived from the efforts of the promoter or a third party?<\/strong><\/p>\n

Regardless of that analysis, previous enforcement decisions haven\u2019t clarified the specific criteria or focal points in which the watchdog concentrated its analysis on.<\/p>\n

The Settlement<\/h2>\n

While Impact Theory did not admit nor deny the charges, it did agree to a cease-and-desist order, in addition to agreeing to pay penalties that totaled around $6.1 million, which included disgorged profits and royalties.\u00a0<\/p>\n

As part of the settlement, the company also agreed to (1)<\/strong> publish the SEC\u2019s order on its company website and social media channels, as well as (2)<\/strong> destroy all of the Founder\u2019s Keys NFTs it had within its control.<\/p>\n

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Will be live in Discord later to answer questions. @impact_theory<\/a> is pleased to announce that we have reached a settlement with the U.S. Securities and Exchange Commission in which we resolved the SEC\u2019s investigation.\u00a0 We are happy to have concluded the SEC\u2019s investigation, so\u2026<\/p>\n

\u2014 Tom Bilyeu (@TomBilyeu) August 28, 2023<\/a><\/p><\/blockquote>\n<\/div>\n<\/figure>\n

The biggest takeaway here is that the SEC was able to determine that these were unregistered securities offerings because of how the Founder\u2019s Keys NFTs were positioned \u2013 an investment opportunity where investors\u2019 funds would be directly allocated towards the development and creation of a future intellectual property franchise for commercial entertainment.\u00a0<\/p>\n

For example, the Order referenced a number of statements from Impact Theory representatives, repasted below:<\/p>\n

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\u201cNow as we\u2019re building out this IP, imagine that you could\u2019ve gotten in on Disney when they were doing Steamboat Willie, and that\u2019s how we think of the Legendary tier. That\u2019s how we think of this whole first drop quite frankly.\u201d\u00a0<\/p>\n<\/blockquote>\n

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\u201cThe key takeaway that I want you to have is that there is a lot of cool things coming in the next 18 to 24 months. And that is ultimately a tiny fraction of the things that will be coming in the next five years. The reason that we\u2019re only selling on the next 18-to-24 month hype is I want you guys to be able to capture 90 percent of the economic value of all the big things that we will do in the coming years beyond that. And the only way to do that is to only sell and set the price based on the things that we\u2019re doing in the short term, and that will leave the upside to be largely captured by you guys.\u201d<\/p>\n<\/blockquote>\n

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\u201cWe\u2019re going to be investing that money into development, into bringing on more team, creating more projects, making sure that we\u2019re delivering just an obscene amount of value. Until people are giggling thinking that they can\u2019t believe that they paid \u2013 you know \u2013 whichever tier they come in on and are getting all this value \u2013 until that\u2019s the sentiment \u2013 we will just keep stocking it with value.\u201d\u00a0<\/p>\n<\/blockquote>\n

Does an NFT offering have to generate \u201cdividends?\u201d<\/h2>\n

Another interesting question that hasn\u2019t yet been addressed in this or previous SEC enforcement actions, is whether an NFT offering must generate \u201cdividends\u201d in order to be considered an actual \u201cpromise\u201d that would essentially form an \u201cinvestment contract?\u201d<\/p>\n

Two SEC commissioners \u2013 Hester Pierce and Mark Uyeda \u2013 dissented with the SEC\u2019s enforcement action, expressing their belief that the NFTs in question \u2013 the Founder\u2019s Keys \u2013 did not generate dividends for their holders, because of that, couldn\u2019t amount to actual \u201cpromises\u201d that were made in statements by Impact Theory and its investors.\u00a0<\/p>\n

On August 23, the U.S. Department of Justice (DOJ) sentenced OpenSea\u2019s former product manager, Nathan Chastain, to three months in prison (and more) in what it called the \u201cfirst-ever digital asset insider trading scheme.\u201d This is also the result of the SEC\u2019s strengthening of its in-house crypto assets and cyber enforcement division, which is prioritizing the illicit usage of crypto and digital collectibles.\u00a0<\/p>\n<\/p><\/div>\n