SEC Settles Landmark NFT Enforcement Action For $6M

Last week, the SEC charged an NFT project with selling unregistered securities in a first for the agency.

Impact Theory, a media company that raised over $30M from NFT sales in 2021, settled the lawsuit for $6.1M without admitting any wrongdoing.

“Although we are disappointed that the SEC has chosen to broadly question the exciting technical innovations that make digital assets possible through the lens of the securities laws, we remain optimistic for the future of this industry in the United States,” said co-founder Tom Bilyeu.

The case could have far-reaching implications for the NFT space, rife with promises of future value and utility.

Orlando Cosme, a managing attorney at OC Advisory, a crypto-focused boutique law firm, thinks it’s possible that the SEC charged the NFT project as part of a broader effort to build a series of settlements.

From the SEC’s perspective, with limited resources and operating in a novel area of the law, “you want a lot of wins,” Cosme told The Defiant. The lawyer emphasized that while Impact Theory didn’t admit any wrongdoing as part of its settlement, the case could still prove useful to the SEC.

“The SEC has this habit of relying on settlements,” he said. Cosme added that the agency can cite settlements without establishing proper legal precedents.

The charges against Impact Theory are the latest blow to a sector that took crypto by storm in the bull market — NFT projects racked up celebrity endorsements with promises of new media empires and talk of recurring income for artists through royalties.

Now, the SEC has picked off an NFT project, leaving the rest of the space, still reeling from price drops of 90% or more, to ponder what’s coming next.

Jordan Teague, who runs a crypto-native law firm, noted that Impact Theory isn’t necessarily a champion of crypto’s ideals, which might have made the organization more likely to settle. “I think we were all like ‘Who’s Impact Theory? Who even was this?’,” Teague told The Defiant.

“I think they were just like, just let us out of here, let us pay a fine and move on,” she said. “As they aren’t a web3 native company, I suspect they may not care about the precedent for the space.”

Deceptive Marketing

The SEC highlighted that Impact Theory claimed it was “trying to build the next Disney.”

Teague said that Impact Theory’s marketing likely played into the SEC’s charges. “I was not surprised to see an enforcement action against an NFT project that really didn’t have a lot of value other than these promises that if you buy our NFTs, we’re going to turn your investment into something valuable.”

Cosme agreed, suggesting that NFT projects be mindful of the language they use when describing their project. “Anything that sounds like, hey, I am offering you an investment, I’m offering these promises, you generally want to avoid,” he said.

Cosme does think that NFTs may prove more resistant to a legal assault than fungible assets, issuers of which the SEC has gone after extensively. With NFTs, some traits become more valuable than others, making it easier to make the argument that the tokens are collectibles, rather than securities.

Moving forward, eyes may turn to the most significant player in the space, Yuga Labs, the creator of Bored Apes, received a probe from the SEC in October 2022.