March 27, 2024
NFT

SEC Charges LA-based Media Company for Unregistered NFT Sales

The United States Securities and Exchange Commission (SEC) has lodged charges against a company in the media and entertainment sector for engaging in unregistered sales of securities. The company in question had sold nonfungible tokens (NFTs) to investors between October and December 2021.

Named Impact Theory, this Los Angeles-based firm specializes in creating entertainment and educational content, including various podcasts. Allegedly, the company managed to amass nearly $30 million through the sale of NFTs referred to as Founder’s Keys, which were presented in three different tiers.

According to the SEC, Impact Theory encouraged potential investors to see the acquisition of a Founder’s Key as an investment in their enterprise. The company’s pitch involved comparisons to Disney, suggesting that if they succeeded, the Founder’s Key purchasers would reap substantial rewards. The SEC determined that these NFTs effectively functioned as investment contracts, thus qualifying as securities. Consequently, the company was found to have violated the Securities Act of 1933 by selling these securities without proper registration.

The SEC issued A cease-and-desist order, which Impact Theory has accepted. As part of this order, the company has been directed to pay over $6.1 million, encompassing disgorgement, prejudgment interest, and a civil penalty. Impact Theory neither admitted nor denied the findings of the SEC.

Additionally, the order mandates the creation of a fund to reimburse investors who bought Founder’s Key NFTs. The company must also destroy any Founder’s Keys within its control, post the order on its online platforms, refrain from receiving royalties from future secondary market NFT sales, and remove such NFTs from circulation.

Recent data from NFT Stats reveals that a top-tier Founder’s Key NFT was sold for $1,468 just two days ago. In the past week, there have been a total of 10 sales within this tier, with the token’s total supply amounting to 13,572 and 4,620 owners. Notably, Founder’s Key is just one of the several NFT offerings made by Impact Theory.

Interestingly, the SEC’s enforcement action marks the first instance involving NFTs. Commissioners Hester Peirce and Mark Uyeda dissented from the action, noting that the NFTs in question weren’t shares in a company and didn’t yield dividends for purchasers. They expressed concern about the extravagant spending on NFTs without clearly understanding their utility or potential returns. They cautioned that such concerns, while valid, might not warrant the jurisdiction of the SEC.

In a contrasting perspective to the SEC’s stance, the promises highlighted by Impact Theory and referenced in the SEC’s order were categorized as not meeting the criteria of an investment contract. The commissioners drew parallels between these promises and statements made by collectible sellers. Additionally, they put forth a set of nine questions for the agency to ponder before pursuing further NFT-related cases:

“Regardless of what one thinks of the Howey analysis, this matter raises larger questions with which the Commission should grapple before bringing additional NFT cases.”

Image by Freepik

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