On Monday, the Securities and Exchange Commission (SEC) charged Los Angeles-based media and entertainment company Impact Theory for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). The company, co-founded by Tom Bilyeu, a YouTube host with over 3.7 million subscribers, raised approximately $30 million from hundreds of investors through the sale of these NFTs.
From October to December 2021, Impact Theory offered and sold three tiers of NFTs known as Founder’s Keys, labeled “Legendary,” “Heroic,” and “Relentless.” The SEC’s order stated that the company encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business. Impact Theory emphasized its ambition to “build the next Disney,” promising “tremendous value” to Founder’s Key purchasers if the company succeeded in its efforts. The SEC concluded that these NFTs were investment contracts and thus fell under the category of securities, making their sale an unregistered offering in violation of federal securities laws.
Regulatory debate intensifies as SEC applies Howey Test to NFTs
The SEC’s decision has sparked a regulatory debate, particularly concerning the application of the Howey Test—a 1946 U.S. Supreme Court case used to determine whether transactions are investment contracts—to NFTs. Republican Commissioners Hester Peirce and Mark Uyeda criticized the SEC’s move, stating that the case raised larger questions that the Commission should address before pursuing additional NFT-related cases. They argued that the promises made by Impact Theory were not sufficient to form an investment contract under the Howey Test.
As part of the settlement, Impact Theory agreed to a cease-and-desist order and will pay more than $6.1 million in disgorgement, prejudgment interest, and civil penalties. The order also establishes a Fair Fund to return monies to injured investors. Furthermore, the company agreed to destroy all Founder’s Keys in its possession and to publish a notice of the order on its websites and social media channels.
The case has far-reaching implications for the NFT market, which has seen exponential growth and diversification in recent years. One Impact Theory Founder’s Key NFT collection listed on OpenSea generated about $5.4 million in trading volume. The SEC’s action could serve as a precedent for future regulatory measures in the NFT space, potentially affecting how these digital assets are classified and traded.
This landmark case also raises questions about the SEC’s future approach to NFTs and other crypto assets. The Commission is now under pressure to provide clearer guidelines and to address the unique challenges posed by these new forms of investment. The SEC’s recent action may serve as a regulatory watershed moment, setting the stage for how NFTs and similar assets will be governed in the coming years.