SEC Vs. NFT – The Fate Of NFTs After SEC Wins NFT Enforcement
Is the SEC actively battling cryptocurrency? Recently, on August 28, the SEC achieved a significant victory by imposing a $6 million fine on Impact Theory for unlawfully vending unregistered securities through NFT Sales.
The SEC alleges that Impact Theory conducted an unregistered offering of crypto asset securities as NFTs raising $30 million in funds from hundreds of investors including those from the United States. According to SEC, Impact Theory promoted three tiers of NFTs known as Founder’s Keys — Legendary, Heroic, and Relentless — between October and December 2021.
SEC claims that the company actively promoted the NFTs as an investment opportunity suggesting that investors stood to profit if the company achieved its goals. However, with comparisons to building “the next Disney” and promising substantial value to purchasers, Impact Theory has positioned the NFTs as a potentially lucrative venture. That’s when the SEC determined that the NFTs constituted investment contracts and thus fell under the definition of securities.
As a result, Impact Theory seemed to have violated federal security laws by offering and selling these “crypto asset securities” without proper registration or exemption.
“Absent a valid exemption, offerings of securities, in whatever form, must be registered… Without registration, investors of all types are deprived of the protections afforded them by robust disclosures and other safeguards long provided by our securities laws,” says SEC’s New York Regional Office Director Antonia Apps as she explains the importance of NFT registration.
In response to the allegations, Impact Theory has agreed to pay the combined penalties of about $6.1 million as part of a settlement with the agency as well as destroy the NFTs in question. Although the Impact Theory team was disappointed that the SEC has chosen to question their exciting innovations towards digital assets, they decided to move forward with business consistent with understanding all of the applicable laws, rules, and regulations.
Should NFTs be subject to securities regulations?
On the other hand, the Monday news raises a lot of questions about the regulatory fate of the multi-billion dollar NFT industry, which until this week had been sidelined by the anger of the SEC chairman Gary Gensler. The SEC’s win against the Impact Theory follows a vociferous rebuke from the Republican minority of the five-seat commission.
SEC commissioners Hester Pearce and Mark Ueda criticized Gensler for attempting to assert dominance over the NFT market, which consists of huge amounts of collectibles and artworks. The two commissioners stated that the SEC does not routinely take enforcement action against people who sell their assets with vague promises of creating a brand and thus boosting the resale value of those tangible items. Hence, the SEC never regulated the art market or trading of luxury goods.
The question now is, will the SEC start regulating the sale of NFT-backed art projects, digital collectibles, and membership passes?
“The SEC has no appetite to engage with the art market.” – Bryan Fly, a law professor at the University of Kentucky who specializes in art and NFTs. “As a result, I do not see any prospect of the SEC regulating the NFT art market.”
If the SEC decides to go after the NFT art market, it will be a delicate decision as many NFTs have already been displayed in some of the world’s prominent art museums and auction houses.
As of now, no one knows as to what the SEC has planned for the NFT market in the future. But what is certain, is that the result of these cases could set a precedent for future regulations and shape the trajectory of the NFT token market as a whole.
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