On August 28, 2023, the Securities and Exchange Commission (the “SEC”) charged Impact Theory, LLC (“Impact Theory”), a media and entertainment company headquartered in Los Angeles, with conducting an unregistered securities offering through its sale of non-fungible tokens (“NFTs”).1 The case represents the SEC’s first enforcement action brought against an NFT issuer. Without admitting or denying the SEC’s findings, Impact Theory agreed to a cease-and-desist order (the “Order”), finding that Impact Theory had violated registration provisions of the Securities Act of 1933 and ordering Impact Theory to pay more than $6.1 million in disgorgement, interest, and civil monetary penalties.
Factual Background and Order
According to the Order, between October 13 and December 6, 2021, Impact Theory raised approximately $30 million in Ethereum (“ETH”) from hundreds of investors, including in the United States, by offering and selling three tiers of NFTs labeled “Legendary,” “Heroic,” and “Relentless” (collectively known as Founder’s Keys or “KeyNFTs”).2 The Order states that Impact Theory encouraged investors to view the purchase of KeyNFTs as an investment and that investors would profit if Impact Theory were successful in “trying to build the next Disney.”3 Further, the Order states that in advance of the Offering, Impact Theory engaged in various marketing efforts, such as hosting live speaking events on Discord, posting recordings of speaking events on YouTube and participating in public interviews on news and social media outlets to promote KeyNFTs.
The Order states the SEC’s position that KeyNFTs constituted “investment contracts” and therefore “securities” under U.S. federal laws, having satisfied each element of the test set forth by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (commonly referred to as the Howey test).4 While the SEC’s finding in a settlement context does not have the force of a judicial holding, this outcome is nevertheless significant as the first time that an NFT issuance has been found to be an unregistered offering of securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933.
The Order also does not delve into whether KeyNFTs have the attributes of collectibles, a typical feature of NFTs. Instead, the SEC refers to KeyNFTs as “purported NFTs,” which indicates the KeyNFTs may have a different form than other NFTs. It is possible that the characteristics or features of the KeyNFTs, as well as Impact Theory’s marketing efforts and receipt of royalties from secondary market sales,5 may have factored into the SEC’s determination.
As part of the settlement with the SEC, Impact Theory has agreed to pay a combined total of more than $6.1 million in disgorgement, interest, and civil monetary penalties.6 A “Fair Fund” will also be established to return payments by injured investors used to purchase the KeyNFTs. Impact Theory also has agreed to destroy all KeyNFTs in its possession or control, publish notice of the Order on its online platforms, and revise the KeyNFTs’ code to prevent Impact Theory from receiving any royalty from future sales.7
Notably, SEC Commissioners Hester Peirce and Mark Uyeda dissented, contending that the Order raises questions that the SEC should have “grappled with” long ago.8 The dissenting commissioners reasoned that the KeyNFTs were more akin to watches, paintings, or collectibles than securities and that Impact Theory did not make the kind of promises to purchasers that would give rise to an “investment contract” under the Howey test. They stated that “[w]e do 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.”9
The Impact Theory settlement suggests that U.S. securities regulators are not backing down from their firm presumption that virtually all digital assets constitute “securities,” despite the SEC’s recent setback in its enforcement action against Ripple.10 Indeed, SEC Chairman Gary Gensler reinforced this position in recent remarks, stating “[a]s I’ve said numerous times, the vast majority of crypto tokens meet the investment contract test. Not liking the message isn’t the same thing as not receiving it.”11
While the Order does not constitute an independent source of law, it does stand for the SEC’s continued insistence that the form of a purported “investment” is irrelevant if the asset satisfies the agency’s broad understanding of the Howey test’s application.
The Order shows that the SEC is continuing to pay close attention to marketing statements made to investors, including through social media, regarding how an issuer intends to use the proceeds from an offering.
The Order may have implications for federal securities class action lawsuits, including the ongoing case against Dapper Labs, in which plaintiffs allege that NBA Top Shot “Moments” are securities.12
Issuers and promoters of NFTs that create or share in ongoing royalties or value from secondary market sales should be aware of the potential application of the securities laws to their activities and seek expert legal advice before launching or marketing their NFTs in the United States.
1. SEC v. Impact Theory, LLC, No. 3-21585 (Aug. 28, 2023).
4. Under the Howey test, an investment contract is any “contract, transaction or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or a third party.”
5. Following the commencement of the offering of KeyNFTs, the digital collectibles soon started trading on various crypto platforms. Impact Theory advertised two of these platforms as places to buy and sell KeyNFTs, and developed a smart contract that gave Impact Theory a 10% royalty on each secondary market sale. Between October 13, 2021, and July 20, 2023, Impact Theory earned about $978,000 in ETH from these royalties. SEC v. Impact Theory, LLC, No. 3-21585 (Aug. 28, 2023).
7. SEC v. Impact Theory, LLC, No. 3-21585 (Aug. 28, 2023).
10. See, Ripple Labs: long-awaited decision answers some questions but gives rise to further uncertainty (July 14, 2023), available at
12. Friel v. Dapper Labs Inc et al, U.S. District Court, Southern District of New York, No. 21-05837.