SEC brought its first NFT enforcement action against Impact Theory

The U.S. Securities and Exchange Commission brought its first enforcement action involving non-fungible tokens on August 28, 2023, finding in a settled administrative order that Impact Theory LLC had offered and sold Founder’s Keys as unregistered crypto-asset securities.

The Los Angeles media company consented to the order without admitting or denying the findings. That procedural posture matters: the action created an agency enforcement precedent, but it was not a court judgment holding that NFTs as a category were securities.

The offering was tied to the company’s promised efforts

The SEC order covered 13,921 Founder’s Keys sold from October 13 through December 6, 2021. The tokens came in Legendary, Heroic and Relentless tiers and carried digital graphics assembled from combinations of symbols. More important to the Commission’s analysis was how Impact Theory promoted them.

The order found that Impact Theory encouraged purchasers to see the tokens as investments in its business, linked their potential value to the company’s work and said offering proceeds would support development, hiring and new projects. The Commission applied the investment-contract test from SEC v. W.J. Howey Co. and concluded that purchasers reasonably expected future profit from Impact Theory’s managerial and entrepreneurial efforts. It therefore found violations of Sections 5(a) and 5(c) of the Securities Act, which govern unregistered offers and sales.

The order states that the sale raised $29,896,237.16 worth of ether from at least hundreds of investors. That dollar amount was the SEC’s calculation using the average of ether’s open and close price in U.S. dollars on each KeyNFT sale date. It is not a count of ether raised, an August 28, 2023 valuation or an independently reconstructed market figure.

Impact Theory also programmed a 10% royalty on secondary-market sales. The SEC said those royalties generated approximately $978,000 worth of ether from October 13, 2021 through July 20, 2023.

The settlement reached code as well as cash

The order required Impact Theory to pay $5,120,718.27 in disgorgement, $483,195.90 in prejudgment interest and a $500,000 civil penalty within 15 days—a total of $6,103,914.17. The Commission created a Fair Fund for potential distribution to harmed investors.

Impact Theory also undertook to destroy Founder’s Keys in its possession or control, publish notice of the order and revise the tokens’ smart contracts or other underlying code to eliminate its royalty from future secondary-market transactions, all within 10 days. Those provisions made the remedy unusually relevant to NFT issuers: it addressed both proceeds and the continuing economics embedded in token software.

The order also recorded earlier remedial measures. Impact Theory had conducted repurchase programs in December 2021 and August 2022, buying back 2,936 KeyNFTs and returning approximately $7.7 million worth of ether. The SEC said it considered those acts when accepting the settlement.

A first action, but not a universal NFT rule

Commissioners Hester Peirce and Mark Uyeda dissented in part on August 28, 2023. They said the case was the Commission’s first NFT enforcement action, disagreed with the Howey application and noted that the settlement included no fraud charge. They also asked whether the agency would provide guidance, how registration could fit NFTs and what the royalty-removal requirement might mean for creators.

Their dissent defined the event-day uncertainty. The majority’s order turned on Impact Theory’s marketing, use of proceeds and promises of value derived from company efforts. It did not establish that every NFT, digital collectible or royalty-bearing token was a security. As of August 28, the verified development was a settled registration case with detailed undertakings—not a judicial classification of the entire NFT market.