NFTs: Are They Securities? The SEC Weighs In

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For a while, the NFT landscape went largely unnoticed by the U.S. Securities and Exchange Commission (SEC). However, as the summer of 2023 drew to a close, with Gary Gensler at the helm, the SEC felt an urgent need to address and regulate the growing non-fungible token market.
Impact Theory found themselves under scrutiny after brazenly raking in $30 million two years prior from their Founder’s Key NFT collection.


Following this, the U.S. Securities and Exchange Commission (SEC) issued a press release, openly accusing the company of conducting securities transactions without appropriate registration.  

The report indicates that in 2021, Impact Theory offered and sold a package of three types of NFTs, or Founder's Keys, named Reckless, Heroic, and Legendary. Additionally, the company encouraged investors to see the purchase of Founder's Keys as an investment opportunity with potential for profit. The SEC regards such NFTs as securities.

“Without a valid registration statement, offers and sales of securities in any form must be registered,” commented Antonia Apps, the Regional Director of the SEC's office in New York.

The agency, under Gary Gensler's leadership, subsequently released a comprehensive document, which essentially boils down to the following allegation.
“Impact Theory violated Section 5(a) of the Securities Act, which states that unless a registration statement is in effect as to a security, it
shall be unlawful.”

The full allegations against the unfortunate NFT publisher can be viewed here.

Impact Theory, neither admitting nor denying the SEC's findings, complied with the order, essentially acknowledging they breached the provisions of a law set nearly a century ago, in 1933.
For its actions, the company has been mandated to pay over $6.1 million, encompassing debt reimbursement, interest accrued prior to the court decision, and civil fines.

Moreover, the SEC instituted a fund dedicated to reimbursing investors who faced losses from purchasing Impact Theory's NFTs (should any be identified). Additionally, the company's potential royalty earnings have been explicitly renounced.


Interestingly, the counterarguments against the measures taken against Impact Theory and its NFT collection came from the SEC itself. Two members of the Commission, notably "Crypto Mom" Hester M. Peirce and Mark T. Uyeda, criticized the Commission's application of the so-called Howey Test to this particular scenario.

Peirce and Ueda characterized the basis for the SEC's order as mundane. Impact Theory had sold NFTs to the tune of tens of millions of dollars and had indicated that these tokens would soon appreciate in value. The SEC flagged an assertion from one of the purchasers: "Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once." This stance by Peirce and Ueda is deemed questionable, especially since the SEC doesn't target sellers of items like watches or paintings who assure collectors that as they establish a strong brand over time, the value of these items will escalate.  
The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract,
the opponents of Gensler noted.
The authors of the statement also highlighted that in 2021-2022, Impact Theory had repurchased its NFTs. In essence, this is akin to terminating the deal — a strategy often employed to rectify breaches in securities registration. The company received tokens worth nearly $8 million from buyers. 

In the U.S., NFTs have not been distinctly classified as an asset class in legislation. This classification is inherently challenging because when one buys or sells an NFT, they are transacting a unique digital identifier — not the actual digital art of a bored monkey or a pixel punk.

On one hand, Hester M. Peirce and Mark T. Ueda have expressed understanding towards the SEC's actions, especially when $30 million is in question. However, they also advocate for a more in-depth discussion about the nature of NFTs, their proper classification, and whether the 1933 legislation provides prospective NFT buyers with adequate information.

Gary Gensler seems to be more inclined towards potentially securing another role within the Biden administration (if the circulating rumors hold any weight) rather than diving into these nuanced discussions.