DLC First NFT-Related Lawsuit: SEC Charges Impact Theory for Unregistered Token Sales -

First NFT-Related Lawsuit: SEC Charges Impact Theory for Unregistered Token Sales

The United States Securities and Exchange Commission (SEC) has taken legal action against Impact Theory, a media company based in Los Angeles, over allegations of selling unregistered securities in the form of cryptocurrency tokens. This marks a significant development as it becomes the SEC’s first lawsuit targeting a non-fungible token (NFT) offering, highlighting the regulatory scrutiny surrounding the burgeoning NFT market.

The SEC has filed a lawsuit against Impact Theory for reportedly raising close to $30 million through the sale of non-fungible tokens called Founder’s Keys between October and December of 2021. The lawsuit alleges that the company did not file a registration statement for these offerings nor did it qualify for an exemption, which is required under federal securities law. Specifically, the SEC complaint claims that Impact Theory violated Sections 5(a) and 5(c) of the Securities Act.

According to the SEC’s findings, Impact Theory marketed these NFTs as an investment opportunity, enticing purchasers with the promise of “tremendous value.” The company drew parallels between this investment potential and early investments in successful companies like Disney and YouTube. The proceeds from these sales were purportedly intended to fuel business growth and ultimately benefit token holders. However, the company failed to register these tokens as securities or meet the requirements for an exemption, thereby falling afoul of regulatory compliance.

Antonia Apps, the director of the SEC’s New York Regional Office, emphasized the importance of registration in a statement, saying, “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 the robust disclosures and other safeguards long provided by our securities laws.”

The allegations further detail that Impact Theory sold nearly 14,000 Founder’s Keys to hundreds of investors across the United States. These sales collectively amassed almost $30 million worth of ether cryptocurrency. The company consolidated these funds in a cryptocurrency wallet and utilized a portion of the proceeds to settle payments with vendors. It was revealed that after the unregistered offering commenced, Founder’s Keys were also traded on secondary markets, where Impact Theory engineered the tokens to collect royalties from subsequent sales.

The SEC’s investigation concluded that Impact Theory’s failure to register the securities or secure an exemption amounted to a breach of federal securities regulations. As part of the settlement, Impact Theory has agreed to pay over $6 million in disgorgement, interest, and penalties. The company has neither admitted nor denied the findings. Additionally, Impact Theory has committed to destroying the tokens in its possession and modifying the smart contract code for the NFTs to eliminate the royalty component.

This case stands as a noteworthy instance of regulatory oversight within the NFT space, signifying the SEC’s intent to enforce existing securities laws in the rapidly evolving world of digital assets and cryptocurrencies.

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