Earthquake for NFTs as SEC Cracks Down on Impact Theory
Posted on 08/28/2023
Every company that has issued non-fungible tokens (NFTs) could be liable from a recent U.S. Securities and Exchange Commission (SEC) ruling.
The SEC charged Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles, with conducting an unregistered offering of crypto asset securities in the form of purported NFTs. Impact Theory raised approximately US$ 29.9 million from hundreds of investors, including investors across the United States, through the offering.
The SEC settlement does not include fraud charges.
Tom Bilyeu runs a popular YouTube channel called Impact Theory. He has 3.74 million YouTube subscribers, according to recent stats. Tom Bilyeu started his nutritional foods company Quest (Quest Bar) in his kitchen and grew it to a value of US$ 1 billion in just five years. In August 2019, The Simply Good Foods Co. (maker of Atkins bars) acquired Quest Nutrition, L.L.C. for around US$ 900 million.
The press release states, “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.” The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key 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 it was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to Founder’s Key purchasers. 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.”
“Absent a valid exemption, offerings of securities, in whatever form, must be registered,” said Antonia Apps, Director of the SEC’s New York Regional Office. “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.”
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. The order also establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs. 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.
Impact Theory was ordered to destroy all KeyNFTs in its possession or control within 10 days of the date of the SEC order.
According to the SEC complaint, “Based on the facts and circumstances set forth below, KeyNFTs were offered and sold as investment contracts, and therefore securities, pursuant to the test laid out in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and its progeny, including the cases referenced by the Commission in its Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017). Purchasers in the KeyNFT offering had a reasonable expectation of obtaining a future profit based on Impact Theory’s managerial and entrepreneurial efforts. Impact Theory violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration.”
The complaint adds, “In total, Impact Theory sold 13,921 KeyNFTs to at least hundreds of investors, including investors in multiple states. In so doing, Impact Theory raised $29,896,237.16 worth of ETH, calculated based on the average of the open and close price of ETH in U.S. dollars on the day of each KeyNFT sale. Impact Theory collected the proceeds from the KeyNFT sales in a single crypto asset wallet and used a portion of those proceeds to pay certain vendors providing services related to Impact Theory’s business.
After the Offering commenced on October 13, 2021, the KeyNFTs also began trading on various secondary market crypto asset trading platforms. Impact Theory stated on its websites and social media channels that KeyNFTs could be purchased and sold on two such secondary market platforms. Impact Theory programmed the smart contract for the KeyNFTs so that the company received a 10% “royalty” on each secondary market sale. Secondary market sales of KeyNFTs generated approximately $978,000 worth of ETH in royalties for Impact Theory between October 13, 2021 and July 20, 2023.”
The complaint adds, ““Everyone here is an early adopter! Buying a founders key is Like investing in Disney, Call of Duty, and YouTube all at once.””