SEC Charges Impact Theory for Unregistered NFT Sales

The Securities and Exchange Commission (SEC) has charged Los Angeles-based media and entertainment firm, Impact Theory, LLC, with conducting an unregistered offering of crypto asset securities in the guise of non-fungible tokens (NFTs). The company, which raised an estimated $30 million from a broad spectrum of investors, including those from the U.S., is now under scrutiny for its actions between October and December 2021.

The SEC’s order reveals that Impact Theory had introduced three categories of NFTs, termed as Founder’s Keys. These were labeled “Legendary,” “Heroic,” and “Relentless.” The company had positioned these NFTs as a form of investment into its operations. Investors were led to believe that their investments would yield profits if Impact Theory’s endeavors bore fruit. The company’s ambitious claim of “trying to build the next Disney” and promises of delivering “tremendous value” to Founder’s Key holders further solidified this belief. The SEC has determined that these NFTs were, in essence, investment contracts, thus classifying them as securities. This means that Impact Theory’s actions were in violation of federal securities laws, as they had offered and sold these securities without registration.

Antonia Apps, Director of the SEC’s New York Regional Office, stated, “Absent a valid exemption, offerings of securities, in whatever form, must be registered.” She emphasized the importance of registration in ensuring that investors are provided with the necessary protections guaranteed by securities laws.

In response to the charges, without admitting or denying the SEC’s findings, Impact Theory has consented to a cease-and-desist order. This order acknowledges the company’s breach of the Securities Act of 1933’s registration provisions. The firm has been ordered to pay over $6.1 million, a sum that includes disgorgement, prejudgment interest, and a civil penalty. Additionally, a Fair Fund will be established to reimburse the investors who had purchased the NFTs. Impact Theory has also committed to destroying all Founder’s Keys in its possession, publicizing the order on its digital platforms, and waiving any royalties from future secondary market transactions involving the Founder’s Keys.

In 2021, crypto analyst ZachXBT had expressed skepticism about the project. In a series of tweets dated October 14, he highlighted potential issues with the project’s financial goals and criticized its roadmap. He pointed out that even if the NFT prices plummeted, the company would still raise around $33 million. He also took a jab at the company’s strategy, stating half of its roadmap was centered on selling more NFTs, while the other half focused on generic entrepreneurial events. Tom Bilyeu, presumably from Impact Theory, responded to ZachXBT’s criticism, acknowledging the need to earn a reputation in the NFT space through consistent actions.

The SEC’s investigation was spearheaded by a team from its New York Regional Office, with assistance from various divisions.

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