On 28 August 2023, the U.S. Securities and Exchange Commission (SEC) announced that it had charged Impact Theory, LLC, a Los Angeles-based media and entertainment company, for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). Through this offering, the company managed to raise around $30 million from hundreds of investors, including those residing in the United States.
The SEC’s order reveals that between October and December 2021, Impact Theory allegedly offered and sold three different types of NFTs, which they labeled as “Founder’s Keys.” These NFTs were categorized into three tiers: “Legendary,” “Heroic,” and “Relentless.” The SEC found that Impact Theory had encouraged potential investors to perceive the purchase of a Founder’s Key as an investment opportunity in the company. The company even went as far as to claim that it was “trying to build the next Disney” and promised “tremendous value” to Founder’s Key holders if the company succeeded in its endeavors.
According to the SEC, these NFTs were, in fact, investment contracts and thus classified as securities. As a result, Impact Theory was in violation of federal securities laws for offering and selling these crypto asset securities to the public without registering the offering or qualifying for an exemption.
Antonia Apps, Director of the SEC’s New York Regional Office, emphasized that all offerings of securities must be registered unless a valid exemption applies. She pointed out that without registration, investors are deprived of the protections provided by securities laws, which include robust disclosures and other safeguards.
Impact Theory has agreed to a cease-and-desist order without admitting or denying the SEC’s findings. The company has been ordered to pay a total of more than $6.1 million, which includes disgorgement, prejudgment interest, and a civil penalty. Additionally, a Fair Fund will be established to return the money to the investors who were harmed. Impact Theory has also committed to destroying all Founder’s Keys in its possession or control, publishing notice of the SEC’s order on its websites and social media channels, and waiving any royalties it might receive from future secondary market transactions involving the Founder’s Keys.
The SEC’s investigation involved multiple divisions and was supervised by Sheldon Pollock, David Hirsch, and Jorge Tenreiro.
