In an enforcement action announced Monday, the SEC charged Los Angeles-based entertainment company Impact Theory with an unregistered offering of securities via non-fungible tokens (NFTs).
As the SEC expands its definition of what types of crypto assets qualify as securities, the case breaks new ground by determining that NFTs fall within the agency’s jurisdiction.
“Without an exemption in effect, any form of securities offering must be registered,” Antonia Apps, director of the SEC’s New York regional office, said in a statement.
The question of whether NFTs qualify as securities has been up in the air for years. A lawsuit filed in the Southern District of New York remains the most high-profile case addressing the issue before the SEC stepped in, with a group of NFT collectors suing Dapper Laps.plaintiff allegedly The cryptocurrency firm made hundreds of millions of dollars selling unregistered securities.
Although Dapper Labs filed to dismiss the case last year, a judge ruled in February that the case could move forward, concluding that NFTs “appear” to qualify as securities.
The spokesman told Dapper to continue to refute Bloomberg“Courts have repeatedly found that consumer goods — including collectibles such as art and basketball cards — are not securities under federal law.”
The difference, according to the judge, is that, for traditional collectibles, their value will not be affected even if the producer goes out of business. With NFTs, developers also manage the blockchain technology behind the collection, whose value can be intertwined with the company’s success.
In Monday’s case, the SEC said that between October and December 2021, Impact Theory offered three layers of NFTs, called Founder’s Keys, and encouraged investors to view the purchase as an investment in the business. According to the SEC, Impact Theory stated that it is “attempting to create the next Disney” and that if the business is successful, the NFT will bring “enormous value” to buyers.
in a order separately, the U.S. Securities and Exchange Commission included public statements from the company’s founders. With regard to NFTs, the company said, “We want to say it opens up the future of everything we do as a company” — in the agency’s view, a default that the product is a security or investment contract. Impact Theory Sells Nearly 14,000 NFTs to Hundreds of Investors, Raising Nearly $30M Worth Ethereum.
While Impact Theory did not admit or deny the SEC’s allegations, it agreed to a cease and desist order and a $6.1 million forfeiture penalty, advance interest and civil penalties. It will also return all proceeds from NFT sales to investors.
It’s unclear whether this enforcement action will be the first to target the broader NFT industry — the SEC has yet to bring any charges against major players in the space, such as Dapper Labs. October 2022, Bloomberg report The SEC is trying to prove whether Yuga Labs (creator of the popular Bored Ape Yacht Club NFT line) was offering unregistered securities, though the agency has yet to file charges.
The broader cryptocurrency industry has often complained that SEC Chairman Gary Gensler has adopted a policy of “enforcement regulation,” filing lawsuits against companies without engaging in rulemaking to clarify the agency’s jurisdiction or how companies obey.Gensler had argued The industry is “rife with fraud, scams and abuse” and existing rules will suffice.
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