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SEC Nabs Its First NFT Case, Commissioner Peirce Won’t Be Throwing a Party

Screenshot of Impact Theory website

Yesterday the SEC announced charges against Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles, for conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs). Impact Theory raised approximately $30 million from hundreds of morons investors, including colossal idiots investors across the United States, through the offering.

Screenshot of Impact Theory website on August 29, 2023
Screenshot of Impact Theory website on August 29, 2023

According to the SEC’s order, from October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as Founder’s Keys, which Impact Theory called “Legendary,” “Heroic,” and “Relentless.” These NFT keys were sold for 1.5 to 3 ETH (Ethereum) per token for the Legendary tier, 0.75 to 1.5 ETH per token for the Heroic tier, and 0.05 to 0.1 ETH per token for the Relentless tier. Each KeyNFT contains a digital graphic that features a combination of four (out of 50 possible) symbols.

In advance of the offering, Impact Theory hosted several live speaking events on Discord, posted recordings of those events on the company’s Discord channels for the public to view, and shared information on Impact Theory’s websites and social media channels. Impact Theory also posted recordings of additional speaking events on YouTube and participated in public interviews on news and social media promoting the KeyNFTs.

Here’s Impact Theory co-founder and CEO (and Quest Nutrition founder!) Tom Bilyeu talking to CoinDesk in October 2021:

Through those events and public statements, Impact Theory invited potential investors to view the purchase of a KeyNFT as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact Theory emphasized that the company was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to KeyNFT purchasers, and that the future value of the KeyNFTs would be significantly greater than their purchase price. For example, Impact Theory stated: “If you’re paying 1.5 [ETH], you’re going to get some massive amount more than that. So no one is going to walk away saying, ‘Oh man, I don’t think I got value here.’ I’m freakishly bullish on that. I will do whatever it takes to make sure that that is true.”

And: “Now as we’re building out this IP, imagine that you could’ve gotten in on Disney when they were doing Steamboat Willie, and that’s how we think of the Legendary tier. That’s how we think of this whole first drop quite frankly.”

The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration.

Without admitting or denying the SEC’s findings, Impact Theory agreed to a cease-and-desist order finding that it violated registration provisions of the Securities Act of 1933 and ordering it to pay a combined total of more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty.

Unimpressed by Commission interpretations as usual, Commissioner Hester Peirce — whose name continues to foil spellcheckers everywhere — dissented. A joint statement with Commissioner Mark T. Uyeda says they dissented in part because they disagreed with the application of the Howey analysis (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)) “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,” they said.

The Peirce and Uyeda statement continues:

The facts underlying the settlement are mostly unremarkable: Impact Theory sold almost $30 million of NFTs along with making loud promises that the NFTs would increase in value. Purchasers of the NFTs shared the excitement; the order quotes one purchaser as saying: “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once.” However, the NFTs were not shares of a company and did not generate any type of dividend for the purchasers. The Commission charged Impact Theory with engaging in an unregistered securities offering on the theory that the NFTs were offered and sold as investment contracts. The settlement does not include fraud charges.

We understand why the Commission was concerned about this NFT sale. Even though we believe strongly that adults should be able to spend their money as they choose, we 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. The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.

Because it is the first NFT settlement, this enforcement action raises many difficult questions, they said. The statement goes on to say that the SEC should have “grappled with these questions” when NFTs first started making the scene.

The NFT market peaked in January 2022 at $17 billion in trading volume, as of July it’s about $73 million.