The US Securities
and Exchange Commission (SEC) has taken its first enforcement action targeting
the non-fungible token (NFT) industry. Today (Monday), the securities regulator
announced that it has charged Impact Theory, a Los Angeles-based media and
entertainment company popular for its podcast, with raising about $30 million
from hundreds of investors, including those in the United States, through its
“unregistered” offering of crypto asset “securities”.
In a
statement, the said it has ordered the company to pay a grand total of
$6.1 million to settle the charges. The grand figure includes a civil monetary
penalty and return of illicit profits plus interest.
Outside the
NFT industry, since December 2020, the SEC has been in a legal tussle with Ripple, a blockchain-based payments
network, over its XRP token which it claims is a securities token. However, in
recent months, the securities regulator has also turned its attention to crypto
exchanges, dragging Binance and Coinbase to court over their crypto
asset “securities” offered on “unregistered” trading platforms.
However, it
appears the NFT industry is next in line. In the statement released on Monday,
the regulator noted that its findings show that NFTs offered by Impact Theory
were investment contracts and therefore securities.
In previous
cases, the regulator argued that tokens listed on crypto exchanges were
“securities” by citing the Howey Test. The Test is a technique used to
determine when a financial transaction qualifies as an “investment contract”
and should be regulated as a security dealing by the SEC. The regulator has
severally contended that transactions are securities when they seek to generate
returns for investors.
Are NFT ‘Securities’ When Sold?
In the new
case against Impact Theory, SEC alleged that the media company between October
and December 2021, marketed and sold three levels of NFTs termed as “Founder’s
Keys.” These tokens were reportedly categorized as “Legendary,”
“Heroic,” and “Relentless.”
“The order
finds that Impact Theory encouraged potential investors to view the purchase of
a Founder’s Key as an investment into the business, stating that investors
would profit from their purchases if Impact Theory was successful in its
efforts,” SEC further explained….
