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LA-Based Entertainment Company, Impact Theory, Faces SEC Charges Over Unregistered NFT Securities Offering

SEC Enforcement | Aug 28, 2023

Pixabay TheDigitalArtist NFT - LA-Based Entertainment Company, Impact Theory, Faces SEC Charges Over Unregistered NFT Securities Offering

Image: Pixabay/TheDigitalArtist

The SEC has charged Los Angeles-based entertainment firm, Impact Theory, for conducting an unregistered offering of securities through NFTs.

Overview

  • Impact Theory's NFT Offerings
    • Between October and December 2021, Impact Theory introduced three tiers of NFTs named "Founder’s Keys." The company promoted these NFTs as an investment opportunity in their business, likening their vision to building the "next Disney."
    • They raised nearly $30 million in Ethereum from the sale of almost 14,000 NFTs.

See:  Consultation Until Sep 20, 2023: OSFI Proposes New Guidelines for Crypto-Asset Exposures in Canada

  • SEC Enforcement
    • In a significant move that underscores the evolving regulatory landscape for digital assets, the U.S. Securities and Exchange Commission (SEC) has taken enforcement action against Impact Theory, LLC.
    • Impact Theory is now under scrutiny for allegedly offering crypto asset securities in the guise of non-fungible tokens (NFTs) without proper registration, and promoted "Founder’s Keys" as an investment in the company. The company even likened its venture to building the "next Disney" and assured potential buyers of the "tremendous value" these NFTs would hold if the business succeeded.
    • While Impact Theory neither admitted nor denied the allegations, they consented to a cease-and-desist order. They were also fined $6.1 million and are required to refund all proceeds from their NFT sales to investors.

SEC's Decision Was Not Unanimous

  • This development not only highlights the SEC's proactive stance on crypto regulations but also serves as a cautionary tale for other entities operating in the rapidly expanding NFT space.
  • However, the SEC's decision has not been unanimous. Commissioners Hester Peirce and Mark Uyeda have expressed their dissent, arguing that the NFTs in question did not represent shares in a company nor produced any dividends. They emphasized the need for the Commission to provide clear guidance on NFTs and their intersection with securities laws, and that the mere hype around NFTs should not be a basis for pulling them into the SEC's jurisdiction.

See:  Hester Peirce Reaffirms That the SEC’s Current Approach to Crypto Is ‘Not a Good Way of Regulating’

  • The statement also raised several pertinent questions about NFTs, such as (see the full list of questions here):
    • How should the SEC categorize NFTs concerning the application of securities laws?
    • What kind of guidance should the SEC provide to NFT creators about potential intersections with securities laws?
    • How can the SEC's registration requirements be tailored to accommodate the unique nature of NFTs?

Broader Implications for NFTs and Crypto

  • It remains to be seen how this enforcement action will influence the broader NFT market. While the SEC has not yet taken legal action against major industry players like Dapper Labs, reports suggest that the agency is investigating other companies, such as Yuga Labs, for potential violations.

See:  Ex-OpenSea Manager Convicted in Landmark NFT Insider-Trading Case

  • An article in The Verge article points out that the SEC's action against Impact Theory might not necessarily mean that the SEC views all NFTs as securities offerings. The focus seems to be on how NFTs are marketed and the intended use of the proceeds from their sales. Some NFT projects, like NBA Top Shot, position their products more as collectibles rather than investment opportunities.

Conclusion

  • The SEC's move has undoubtedly stirred discussions in the crypto community. As the line between NFTs and securities becomes blurrier, companies operating in this space must tread carefully and ensure compliance with regulatory standards.  The action against Impact Theory has set a precedent, and it remains to be seen how this will shape the future of NFTs and their classification under securities laws.

NCFA Jan 2018 resize - LA-Based Entertainment Company, Impact Theory, Faces SEC Charges Over Unregistered NFT Securities OfferingThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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