One question that the blockchain space has had to deal with for years has to do with the status of its assets. From cryptos to NFTs, there is a lot of interest surrounding what they are. Are they securities? Are they utilities? Something in between? One organization that has been very interested is the Securities and Exchange Commission (SEC) in the United States. The SEC has gone after crypto projects, crypto exchanges, non-crypto firms that issued tokens, and now, NFTs. Notably, the SEC scored a legal victory over an LA-based entertainment company called Impact Theory. The case, of course, had to do with the perceived legal status of an NFT project.
What Happened With Impact Theory
The Impact Theory saga began in 2021 when the media company started offering NFTs for sale. The assets, dubbed KeyNFT, allowed users to possibly receive a share of Impact Theory’s profits in the future. There were three tiers of investment, “Legendary,” “Heroic,” and “Relentless,” and the company raised a reported $30 million from the sales of the NFTs.
Sadly, this got them in trouble with the SEC. The argument made was that by using the NFTs as a way to distribute future profits and raise funds, Impact Theory had sold unregistered securities.
“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,” a statement from the SEC said, as the commission charged the company for this act.
Impact Theory did not confirm or deny these allegations but did take some steps to rectify them. The company agreed to a cease-and-desist order, paid a $6.1 million fine, created a fund to pay back investors, destroyed all the NFTs still under its control, and eliminated any royalties it might receive from secondary sales of the NFTs.
Why This is Significant?
This case is a landmark one because it is the first instance of NFT enforcement on the part of the SEC. The commission has gone toe-to-toe with everyone from Coinbase to Ripple Labs over the years but NFTs had previously been spared that treatment. However, this case sets a precedent that could affect some NFT projects in the future.
You see, when it comes to crypto, the debate about its legal status tends to stem from the financial benefits users can get from it. This is where the argument always comes in of what makes a crypto a utility token vs an investment. Many crypto products are advertised using the selling point of future profits to lure in investors.
While most NFTs, on the other hand, tend to emphasize other things like rarity and utility, many have also offered a share of future profits to buyers. There hasn’t been much prosecution thus far, but this could very well change. It was made very clear in the SEC’s statement wasn’t the fact that NFTs were being sold but that they were essentially tokenizing future profit shares, which is dangerously close to a security.
This means that a whole class of NFTs could be subject to the same treatment. NFT collections that are basically just art pieces, NFTs for use in-game, and NFTs that unlock prizes and special experiences will probably not be getting cease-and-desist from the SEC anytime soon. However, the NFTs that are being sold to raise funds for upcoming projects and promise a share of profits in return might find themselves in hot water soon.
So what to do in that case? Projects that have issued NFTs with the prospect of future profits would probably want to seek legal advice. Depending on their unique situation, a course correction that would see their NFTs go from potential investment to utilities might be best.
Impact Theory themselves have gotten the message as its founder Tom Bilyeu announced on Twitter that new NFTs will be released, and unlike the ones flagged by the SEC, will be purely utilitarian. This protects the company from any future legal trouble but also allows it to keep releasing NFTs.
Will be live in Discord later to answer questions. @impact_theory is pleased to announce that we have reached a settlement with the U.S. Securities and Exchange Commission in which we resolved the SEC’s investigation. We are happy to have concluded the SEC’s investigation, so…
— Tom Bilyeu (@TomBilyeu) August 28, 2023
Future NFT Legislation
For years, it seemed that NFTs were either not on the SEC’s radar at all or were safe from any legal action from it. This case is the first but will likely not be the last. As regulators are catching up with the developments of the SEC industry, the line between digital collectables and unregistered assets will be drawn and it is up to stakeholders to adjust to these developments.
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*All investment/financial opinions expressed by NFT Plazas are from the personal research and experience of our site moderators and are intended as educational material only. Individuals are required to fully research any product prior to making any kind of investment.
Tokoni Uti has written extensively on blockchain and cryptocurrency for years. Her work has appeared on sites like BTCmanager and Blockchain Reporter. She has a degree in Corporate Communications.