On August 28, 2023, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the Los Angeles-based media and entertainment company, Impact Theory, accusing them of issuing NFTs in the form of unregistered crypto asset securities. Through this issuance, Impact Theory raised approximately $30 million from several hundred investors, including those from various parts of the United States.
The SEC alleges that Impact Theory offered and sold NFTs named "Founder’s Keys," which came in three different tiers: "Legendary," "Heroic," and "Relentless." Impact Theory encouraged potential investors to view the purchase of "Founder’s Keys" as an investment in the business, claiming that if Impact Theory succeeded in its endeavors, the investors would profit from their purchase. The company emphasized its ambition to "build the next Disney" and that if successful, it would provide "tremendous value" to the purchasers of "Founder’s Keys."
However, the SEC believes these NFTs were actually investment contracts and, therefore, securities. As such, Impact Theory violated federal securities laws by conducting an unregistered public offering, and this issuance did not qualify for a registration exemption.
The SEC stated that Impact Theory planned to use the NFT proceeds for "development," "bringing in more teams," and "creating more projects." Given these assertions, many potential and actual buyers of the KeyNFTs expressed that they viewed the KeyNFT as an investment in the company, interpreting Impact Theory's claims to mean that the company's development of its projects would appreciate the value of KeyNFT over time.
As of now, Impact Theory has agreed to settle the lawsuit and will pay approximately $6.1 million in "disgorgement, prejudgment interest, and civil penalties." Moreover, Impact Theory will establish a "fairness fund" to reimburse "harmed investors." All existing "Founder’s Keys" owned by the company will be destroyed.
The case has sparked controversy over whether NFTs should be classified as securities. Compared to traditional securities, NFTs more closely resemble collectibles like Pokémon cards, sneakers, or watches. Therefore, the potential arguments for stronger membership evidence, consumer nature, and utility could bring up numerous complex issues related to securities law.
Antonia Apps, the Director of the SEC's New York Regional Office, commented, "Any form of securities issuance must be registered unless there is a valid exemption." This suggests that even emerging forms of crypto asset securities need to adhere to the registration requirements set out in securities laws. Only after legally registering can issuances and sales be conducted within compliant boundaries.
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