As the Non-Fungible Tokens market has continued to expand in recent years, it has garnered the attention of regulators, particularly the United States Securities and Exchange Commission (SEC). This is evident in the recent fine against an LA-based media company for allegedly selling its NFTs as unregistered securities. It is the SEC’s first-ever enforcement action against the sale of NFTs, which is making many wonder if this action signals an impending crackdown against a broader array of Non-Fungible Tokens projects.
Unveiling the Securities and Exchange Commission’s Case Against Impact Theory: Inside the Legal Battle
From October through December 2021, Founder’s Keys, a collection of NFTs, were sold. Impact Theory, the company in charge of these NFTs, reportedly promised buyers that they would profit from their purchases if the business succeeded in the future, according to the SEC. According to reports, Impact Theory generated about $30 million in revenue from NFT sales.
The SEC claims that these NFTs should be categorized as investment contracts, which would classify them as securities because they promise to offer significant value to the Founder’s Key buyers. Usually, the SEC must be notified of the registration of these securities before they can be sold to the general public.
The SEC employs the “Howey test,” which includes the following standards, to determine whether something qualifies as an investment contract: A financial investment has been made in a shared endeavor with the expectation of a profit, and the profit is solely based on the efforts of others.
In light of the SEC’s recent revelation, the multi-billion dollar NFT market’s regulatory future is quite uncertain.
The Republican minority on the five-seat SEC quickly criticized the SEC’s announcement on Monday, as it continues a trend that has been standard for its crypto-related cases. Hester Peirce and Mark Uyeda of the SEC criticized their chairman for wanting to seize control of the NFT market, which is primarily digital collectibles and artwork.
The SEC has never enforced regulations on the high-end products industry or the art market. Given its current animosity against products related to cryptocurrencies, could the Commission be persuaded to start regulating the sale of NFT-backed art projects, digital collectibles, and membership passes? Experts wonder if its recent action is a purposeful signal that the SEC is focusing on the entire NFT industry, or was it the dismantling of a typical securities scam that happened to involve NFTs?
Ultimately, it will take careful consideration for the SEC to determine if it can pursue significant PFP projects without appearing as an intruder in the art world; several of these NFTs have already been shown in some of the world’s most prestigious art museums and auction houses.
Takeaways
Experts speculate that one possible indicator of the Securities and Exchange Commission’s plans for the Non-Fungible Tokens market is evident in the agency’s cease-and-desist order issued Monday involving Impact Theory. The SEC used the fact that Impact Theory received a 10% creator royalty on every resale of its “Founder’s Key” NFTs to support its allegation that the media company’s NFTs were unregistered securities.
