An offering of non-fungible tokens was deemed an unlawful offering of securities without registration by the Securities and Exchange Commission in a novel Order of first impression accepting a settlement of proposed charges against Impact Theory, LLC on August 28, 2023.

According to the SEC, from October through December 2021, Impact Theory offered and sold three tiers of NFTs it termed “Founder’s Keys” to the public. Each of these keys contained a digital graphic that included four out of a possible 50 symbols. The SEC claimed that Impact Theory promoted purchases of these keys as investments in its business. The SEC said that, “Impact Theory emphasized that the company was ‘trying to build the next Disney,’ and, if successful, it would deliver ‘tremendous value’ to [key] purchasers, and that the future value of [keys] would be significantly greater than their purchase price.”

Because Impact Theory did not register its offer and sale of these keys with the SEC and did not satisfy any exemption from registration, the SEC asserted that its offer and sale violated the law. Impact Theory agreed to pay a penalty of $6.1 million as disgorgement, pre-judgment interest and a civil fine to resolve this matter, among other conditions. 

Importantly, the SEC did not conclude that the NFTs themselves were securities; but solely the manner in which they were offered and sold.

Ordinarily, NFTs are digital code recorded on a blockchain that represents ownership in unique digital or tangible assets or property. As their name suggests, NFTs are non-fungible, unlike equity shares of companies that are typically fungible. Offers and sales of NFTs do not typically involve the investment of money in a common enterprise with the expectation of profits through the efforts of others (i.e., the standards to assess an investment contract (a type of security) under SEC v. WJ Howey), because purchases of NFTs usually represent the purchases of unique ownership rights, and profits that might be expected on an NFT results through the appreciation of its particular value and not the value of any enterprise.

In a partial dissent to the Settlement Order, Commissioners Hester M. Peirce and Mark Uyeda questioned why the SEC determined to bring its case against Impact Theory “[e]ven if the NFT sales here fit squarely within Howey…” This is because the typical remedy for an unregistered security offering is rescission, and Impact Theory, prior to entering into the Settlement Order, already paid out $7.7 million worth of ether following offers to repurchase keys from buyers in December 2021 and August 2022. Both Commissioners implored the SEC to consider a number of specific questions they posited to help the SEC fashion an approach to NFTs going forward.

Separately, last week, Nathaniel Chastin was sentenced to three months in prison following his May 2023 conviction for wire fraud and money laundering in a criminal action brought by the US Department of Justice in connection with his alleged scheme to purchase digital cartoon image NFTs relying on his knowledge of confidential information that such images would be featured on OpenSea, a marketplace for NFTs and his then employer.

Click here to access information regarding the SEC’s enforcement action against Impact Theory.

Click here to access Commissioners Hester M. Peirce’s and Mark Uyeda’s partial dissent to the SEC Order in Impact Theory.

Click here to access information regarding the sentencing of Nathanial Chastain