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Home MEDIA

SEC Charges an Entertainment Company for Selling NFTs as Unregistered Securities

BlockNews Team by BlockNews Team
August 30, 2023
in MEDIA, NFT, POLITICS
Reading Time: 3 mins read
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  • SEC has charged an entertainment company for selling NFTs to investors in 2021.
  • The United States Securities and Exchange Commission has ordered a cease-and-desist to Impact Theory alongside other procedures.

NFT Cases May Now Fall Under SEC’s Watchful Eyes

Impact Theory, a Los Angeles-based entertainment company, has been charged by the Securities and Exchange Commission for selling NFTs to its investors in 2021. According to the statement released on the SEC’s official website, the sold NFT qualifies as an investment contract. The SEC has issued a cease-and-desist order to Impact Theory. According to sources, Impact Theory has agreed to the order.

Impact Theory must pay a penalty sum of $6.1 million in prejudgment interest, disgorgement, and a civil penalty. In addition, the entertainment company has also been mandated to refund its investors the money paid for The Founder’s Keys, the NFT, through a Fair Fund.

In October 2021, Zach, the crypto industry’s “2D detective,” posted an X thread on the suspicious intentions of Impact Theory. According to him, the entertainment company was a growth mindset pyramid scheme trying to raise 20k $ETH.

Impact Theory claimed to be building the next “Disney” and buying Founder’s Keys; the company’s NFT would grant access to exclusive events and digital perks.

Less than two years later, the United States Securities and Exchange Commission charged Impact Theory with the sale of unregistered securities, which violated the Securities Act of 1933.

According to the SEC press release, the media company sold crypto asset securities through its NFTs. Impact Theory raised $30 million from investors, including U.S. investors, by selling its non-fungible tokens.

The media company had encouraged investors to view the NFTs as an investment into its business of building the next Disney

“Absent a valid exemption, offerings of securities, in whatever form, must be registered; without registration, investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws,” Antonia Apps (Director of the SEC’s New York Regional Office) said.

In addition to the cease-and-desist order by the SEC, a Fair Fund will be established to return money investors paid to purchase the NFT.

“Impact Theory agreed to destroy all Founder’s Keys in its possession or control, publish notice of the order on its websites and social media channels, and eliminate any royalty that Impact Theory might otherwise receive from future secondary market transactions involving the Founder’s Keys,” The press release stated.

SEC Commissioners Share Dissenting View

While the SEC scrutiny touched NFT projects for the first time, SEC Commissioners, Hester Peirce and Mark Uyeda, shared their opposing views.

“[W]e share our colleagues’ worry about the type of hype that entices people to spend almost $30 million for NFTs seemingly without having a clear idea about how they will use, enjoy, or profit from them. This legitimate concern, however, is not a sufficient basis to pull the matter into our jurisdiction,” They said.

“The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract.”

They both suggested a guideline of nine questions that would help the agency “approach the topic sensibly”.

Disclaimer: BlockNews provides independent reporting on crypto, blockchain, and digital finance. All content is for informational purposes only and does not constitute financial advice. Readers should do their own research before making investment decisions. Some articles may use AI tools to assist in drafting, but every piece is reviewed and edited by our editorial team of experienced crypto writers and analysts before publication.
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