SEC’s Enforcement Action Against NFTs Could Hurt the Industry

• The SEC first enforcement action against NFT offerings last month sets a bad precedent.
• The regulator alleged that the NFTs issued by Impact Theory qualified as unregistered securities.
• Many in crypto quarters said the action foreshadows other future actions against NFT projects.

The U.S. Securities and Exchange Commission (SEC) last month made its first regulatory move against NFT offerings, unsettling the entire crypto market. Many in crypto quarters believe the recent action sets a bad precedent for the SEC to target other projects in a similar fashion.

Regulatory scrutiny of the crypto space increased following several institutional failures and collapses. With the recent SEC action, many believe NFTs could face more regulatory heat. Not only that, there is also the fear of regulators in other jurisdictions following the SEC’s steps against NFTs.

For the longest time, NFTs have remained one of the digital assets to have eluded regulatory scrutiny. As a result, several crypto investors have poured into the NFT market as a haven asset.

In late August, the SEC alleged that entertainment company Impact Theory’s sale of NFTs constituted an offering of unregistered securities. In particular, the regulator claimed that the company’s Founders Key NFT collection were investments in the company.

Issued in 2021, Impact Theory had raised $27 million from selling these NFTs to U.S residents. It also promised to use the proceeds for development. But according to the SEC, the NFTs were issued under loud promises of high returns. Additionally, the SEC claimed the company used the proceeds to fund its operations.

To settle the allegations, Impact Theory was asked to delist its NFTs and buy them back from current holders. The company also paid $6 million in penalties to the regulator. However, the company noted its disappointment in the action against it by the SEC, while promising to release future NFT projects.

Notably, it appears not everyone in the SEC was onboard with the enforcement action. Shortly after the action, two SEC commissioners spoke out against the regulator, dissenting with the basis for instituting the action.

Nonetheless, it appears the NFT market could see more regulatory actions targeting NFT offerings and issuance. An increased scrutiny of NFT collection could likely result in reduced investment in the NFT market.