The U.S. Securities and Exchange Commission is suing a non-fungible token project, marking the first time the authority has taken enforcement action against a company for selling unregistered NFTs.
Impact Theory, a Los Angeles-based media company, “encouraged potential investors to view the purchase of Founder’s Key [the company’s NFT project] as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts,” the SEC order said, adding that the digital assets offered to investors were in the form of “investment contracts” and therefore “securities.”
All in all, Impact Theory raised around $30 million from hundreds of investors, including those in the U.S.
The case is significant to the crypto industry, which has been hit with a flurry of regulatory clampdowns in the U.S., as it offers a clue for how NFTs could be regulated in the future. Many other NFT projects have used language that’s similar to how Impact Theory marketed its digital assets, that is, touting their blockchain-based identifiers representing digital asset ownership as investment opportunities.
Impact Theory neither admitted nor denied the SEC’s findings but agreed to pay more than $6.1 million in penalties to settle the allegations. The order also established a “Fair Fund” to compensate impacted investors as well as required Impact Theory to destroy all of its Founder’s Key NFTs and eliminate any royalties that it might collect from secondary market transactions.
The company is not giving up on its NFT endeavor. In an X post, the founder of Impact Theory stressed that his company will ensure its future digital assets will be of utility rather than financial purposes:
“We will operate our go-forward business consistent with our good faith best understanding of all applicable laws, rules, and regulations, will make clear that all of Impact Theory’s digital assets are collectibles with utility within the exciting new landscape of Borderless Entertainment, and will fiercely discourage people from treating our digital assets as anything other than what they are—collectibles with utility. We will have more news on this in the coming weeks and months.”