The U.S. Securities and Exchange Commission (SEC) recently announced charges against and settlements with two NFT issuers for allegedly conducting illegally unregistered offers and sales of securities in the form of “non-fungible tokens,” or NFTs, in violation of Section 5 of the Securities Act of 1933 (the Securities Act). One issuer is a California-based media and entertainment company, Impact Theory, LLC, while the other, Stoner Cats 2, LLC, is the producer of an adult animated television show about cats that become sentient after being exposed to their owner’s medical marijuana. These are the SEC’s first two public actions against NFT issuers under the federal securities laws.
The actions strongly suggest that there could be additional SEC scrutiny of NFTs, and also that issuers selling these assets should consider whether their design, marketing, tradability, and other features might create an “investment contract” regulated under the federal securities laws.
Why the NFTs Were Deemed Securities
Impact Theory offered and sold NFTs known as “Founder’s Keys.” There were three tiers of these NFTs: “Legendary,” “Heroic,” and “Relentless.” Each Founder’s Key contains a digital graphic that features a combination of four out of 50 possible symbols. According to the SEC, Impact Theory “invited 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.”1 Based on this and other characteristics of the Founder’s Keys and their sales, the SEC found that the Founder’s Key NFTs were offered and sold as “investment contracts” under the test developed in SEC v. W.J. Howey2 and that the distribution was therefore an illegally unregistered securities offering.
The SEC’s order primarily focused on Impact Theory’s marketing efforts, which involved public events and recordings posted on the company’s website, Discord, YouTube, and other social media outlets. According to the SEC, statements by Impact Theory through these channels led investors to develop a reasonable expectation of returns on their investment based primarily on Impact Theory’s managerial and entrepreneurial efforts to grow the business. For example, Impact Theory told investors that the company was using cash raised through its NFT sales to build the company by funding development, hiring, additional projects, and other activities, in order to ensure the company was “delivering just an obscene amount of value.”3 Impact Theory likened investing in Founder’s Keys to early investing in Facebook, Disney, Call of Duty, and YouTube. The company also publicly shared its view that the fortunes of Founder’s Key purchasers, Impact Theory, and Impact Theory’s founders were all economically linked.
The SEC’s case against Stoner Cats 2 (SC2) is similar in many respects to its case against Impact Theory. The SEC alleged that SC2 offered and sold its NFTs to the public to finance the production of its animated web series called Stoner Cats. The Stoner Cats NFTs were each linked to a uniquely generated image of one of the Stoner Cats characters. SC2 engaged in an extensive media campaign to promote the Stoner Cats NFTs both before and after the offering. Purchasers could not choose their NFTs in the offering, but instead received a random token, with SC2 reserving all commercial rights to the underlying intellectual property, including the Stoner Cat images.
As in the Impact Theory order, the SEC alleged that SC2 primed investor expectations by promoting its NFTs on its website; through social media outlets including YouTube, Twitter, Instagram, and Discord; on podcasts; and through interviews on network and cable television. Through these promotional efforts, SC2 emphasized its team’s expertise and ability to execute the Stoner Cats project and indicated that the proceeds of the offering would fund the production of the Stoner Cats web series. SC2 allegedly further fueled investor expectations of profit based on its managerial activities by highlighting specific benefits of owning the Stoner Cats NFTs, including, among others, exclusive access to Stoner Cats content “in perpetuity”; exclusive access to the Discord Stoner Cats community, which included events, contests, and opportunities to engage with the creators of the animated show; and, importantly, the option for holders to resell their NFTs on the secondary market.4
In addition, the SEC alleged that SC2 received a 2.5 percent royalty for each secondary transaction in Stoner Cats NFTs traded on an NFT marketplace with which SC2 worked with to ensure this would occur. These royalties, according to the SEC, created incentives for SC2 to encourage individuals to buy and sell the Stoner Cats NFTs in the secondary market, and also helped assure NFT owners that SC2 would remain committed to the animated show.
The SEC also noted that SC2 would retain a number of NFTs for its own account.
Dissent by Commissioners Peirce and Uyeda
Notably, SEC Commissioners Hester M. Peirce and Mark T. Uyeda dissented from both orders, noting, among other things, that although the marketing statements relating to the NFTs may have constituted fraud and/or misled investors, they did not necessarily involve securities law violations. In their Impact Theory dissent, the two noted that the SEC does not “…routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.”5
Similarly, in their dissent from the Stoner Cats order, Commissioners Peirce and Uyeda observed that the Stoner Cats NFTs were an instance of “fan crowdfunding,” and that the NFTs were similar to Star Wars certificates sold in the 1970s that were redeemable for action figures and fan club membership. Agreeing that “NFT creators, along with other artists, do not get a free pass from the securities laws,” Commissioners Peirce and Uyeda nevertheless observed that “[r]ather than arbitrarily bringing enforcement actions against NFT projects, we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.”6
How the SEC’s Analysis Fits with Prior Guidance
Although the SEC has routinely found that tokens and similar crypto assets are securities,7 these prior actions and related guidance had thus far not included any NFTs. This is perhaps because many NFTs have features, such as innovative artwork, access to experiences or other exclusive content, and unique identifiers or other markers that make them “non-fungible,” that are consumptive in nature and make the NFTs comparable to collectible items like classic cars, rare paintings, and baseball cards. The SEC has not, absent other services or features, treated these types of collectibles as securities.
Importantly, however, the SEC and the federal courts have found that certain features of collectibles and the way they are sold can create “investment contracts” regulated under the federal securities laws.8 In many cases, the analysis turns at least in part on whether the promises and services of the seller or sponsor create an expectation of profit that will be generated based on something other than pure demand-based forces. The relevant activities of a sponsor can include, for example, its marketing of the collectible as a potential investment that will rise in value or assistance in valuing the collectible or otherwise preparing it for sale.9 Other efforts that courts and the SEC have pointed to include the creation of a secondary market for the collectible; or the development of a supporting platform or “ecosystem” for it through activities such as providing expertise around selection, arranging for storage and administrative support, and creating a centralized source of information relating to the collectible.10
The SEC’s approach to the Impact Theory and Stoner Cats NFTs reflects aspects of the reasoning described above. The SEC’s approach is also consistent with findings from earlier this year by the district court for the Southern District Court of New York, which allowed a class action to proceed against Dapper Labs after finding that the company’s “Moments” NFTs may be investment contracts and thus securities. The court found that, among other things, Dapper Labs marketed Moments NFTs as potentially rising in value and maintained the proprietary blockchain and platform on which Moments are held and traded.11
The Stoner Cats settlement order also reflects elements of guidance concerning when memberships, such as golf or tennis club memberships12 or sports fan club memberships,13 may be treated as securities under federal law. That guidance suggests that in cases where memberships are sold prior to the development of club facilities and other benefits and/or can be transferred to third parties fairly easily and for profit, they may involve the type of “expectation of profit” based on the developer’s efforts that can create a security.
Finally, the two NFT orders show how a Howey analysis can apply in the same way to NFTs as the SEC has applied it to tokens distributed through initial coin offerings or other mechanisms. Here, as in prior SEC orders and actions regarding crypto assets, relevant features include an issuer’s actions in creating or supporting a secondary market, how the sponsor will deploy funds raised from sales, advertisement of the sponsor’s expertise or ability to build or grow the value of the network or an asset, and/or decisions to retain a stake or interest in an NFT.14
Companies involved in issuing or facilitating the creation of NFTs should take note that the SEC is scrutinizing the space. An SEC action against NFTs has long been threatened—it is almost a year since the first reports that the SEC had begun probing whether Yuga Labs, creator of the “Bored Ape” NFTs, had engaged in an unregistered offering of securities.15
In addition, it is clear that at least according to the SEC, ostensibly “collectible” NFTs can be regulated as securities. Notably, the SEC referred to the Founder’s Keys as “purported” NFTs, which might suggest that the SEC views certain other NFTs as items that are not regulated under the securities laws. A particular question raised by this statement is whether the “fungibility” represented by the “F” in NFT is relevant to a Howey analysis of a token’s status as an investment contract, and if so, how and to what extent non-fungibility plays into the analysis. It is possible, for example, that a truly non-fungible (i.e., one-of-a-kind or one-of-a-few) token would, without more of the features described above, be presumptively treated as an asset that is purchased for enjoyment and collectability and, as a result, does not involve an “investment contract.” Neither the Impact Theory order nor the Stoner Cats order provides explicit guidance on that question, however.
In this context, companies in the NFT space should carefully consider how the features of an NFT, its marketing, its tradability, and the creation of an “ecosystem” surrounding it, among other characteristics, can create an expectation of profit based primarily on the real or perceived efforts of the seller or sponsor. Similarly, NFT companies should consider the implications of retaining a stake or interest in their NFTs and of sharing future project development ideas that will be funded by an NFT sale in project forums.
 SEC, In the Matter of Impact Theory, LLC, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order, at 3 (August 28, 2023).
 328 U.S. 293 (1946). In Howey, the U.S. Supreme Court developed a four-part test for whether a contract, transaction, or scheme is an “investment contract” and thus a “security” under the Securities Act. Under Howey an investment contract exists when the contract, transaction, or scheme in question involves 1) an investment of money 2) in a common enterprise 3) with an expectation of profit 4) primarily derived from the efforts of others. The definition of a “security” in Section 2(a)(1) of the Securities Act provides a list of assets that includes an “investment contract.”
 Impact Theory at 4.
 SEC, In the Matter of Stoner Cats 2, LLC, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order, at 4-6 (September 13, 2023). SC2 also promised that if 100 percent of the NFTs were sold (which did in fact happen), it would facilitate the creation of a decentralized autonomous organization (DAO) comprised of Stoner Cats NFT holders and commit to working with the DAO to “develop at least one new animation project a year for the next three years.” NFT holders would have access to this additional content.
 SEC Commissioners Hester M. Peirce and Mark T. Uyeda, NFTs & the SEC: Statement on Impact Theory, LLC (Aug. 28, 2023), https://www.sec.gov/news/statement/peirce-uyeda-statement-nft-082823, (dissenting statement regarding the Impact Theory order).
 SEC Commissioners Hester M. Peirce and Mark T. Uyeda, Collecting Enforcement Actions: Statement on Stoner Cats 2, LLC (Sept. 13, 2023), https://www.sec.gov/news/statement/peirce-uyeda-statement-stonercats-091323 (dissenting statement regarding the Stoner Cats order).
 See, e.g., SEC v. Celsius Network Limited, Complaint at 49, 1:23-cv-06005 (S.D.N.Y. 2023) (alleging CEL token is a security); SEC v. Coinbase, Inc., et al., Complaint at 98-99, 1:23-cv-04738 (S.D.N.Y. 2023) (alleging that at least 13 crypto tokens listed by Coinbase are securities); SEC v. Binance Holdings Limited, et al., Complaint at 125-27, 1:23-cv-01599 (D.D.C. 2023) (alleging that at least 12 crypto tokens listed by Binance are securities); SEC v. Ripple Labs Inc., Complaint at 67-68, 1:20-cv-10832 (D.D.C. 2020) (alleging that the XRP token is a security).
 See, e.g., SEC v. Brigadoon Scotch Dist., Ltd., 388 F. Supp. 1288 (S.D.N.Y. 1975) (rare coin portfolio selection services); Photographic Artists Ltd., Inc., SEC Staff Denial of No-Action Request (Oct. 6, 1977) (“Photographic Letter”) (production, marketing, and advertising services for photographic transparencies); Metropolitan Graphic Art Distributors, Inc., SEC Staff Denial of No-Action Request (May 31, 1977) (“MGA Letter”) (resale services, publication of daily price quotations, and repurchase and resale services for limited edition art prints).
 See, e.g., Brigadoon, 388 F. Supp. at 1288 (promoter’s marketing of coin portfolios was geared toward value appreciation); Marini v. Adamo, 812 F. Supp. 2d 243 (E.D.N.Y. 2011) (marketing suggested that rare coins could not decrease in value); Friel v. Dapper Labs, Inc., Ord. on Motion to Dismiss at 63, 1:21-cv-05837-VM (S.D.N.Y. 2023) (collectibles were promoted concurrently with a marketplace on which purchasers were told they could “realize substantial profits through the low sale prices,” thus creating the expectation of profit based on issuers’ efforts); Photographic Letter (sale of original photographic transparencies, with purchasers offered a production and marketing agreement with the sponsor, may involve the offering of a security).
 See, e.g., Daggett v. Jackie Fine Arts, Inc., 733 P.2d 1142 (Ariz. Ct. App. 1986) (promoter provided list of distributers for art resale); MGA Letter (promoter offered daily value quotations and would assist purchasers in finding a market for the prints).
 Dapper Labs, Ord. on Motion to Dismiss at 63.
 See, e.g., Coral Beach & Tennis Club, SEC Staff No-Action Letter (January 25, 2012) (memberships could only be transferred by resigning the membership back to the club with a cap on potential profits); Stoneridge Golf and Country Club, SEC Staff No-Action Letter (Jan. 3, 1975) (no-action relief granted after the club made memberships non-transferable except at cost, reversing Stoneridge Golf and Country Club, SEC Staff Denial of No-Action Request (Nov. 5, 1974) (memberships could be transferred at a profit)).
 See, e.g., LA Fan Club, Inc., SEC Staff No-Action Letter (June 28, 2017) (fans receive access to exclusive events, merchandise deals, and tickets but are subject to significant restrictions on transfer, among others).
 See SEC, Framework for “Investment Contract” Analysis of Digital Assets (Apr. 3, 2019), https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets (last visited Sept. 13, 2023).
 See Matt Robinson, Bored-Ape Creator Yuga Labs Faces SEC Probe Over Unregistered Offerings, Bloomberg, Oct. 11, 2022, https://www.bloomberg.com/news/articles/2022-10-11/bored-ape-creator-yuga-labs-faces-sec-probe-over-unregistered-offerings (last visited Sept. 13, 2023).