We previously reported on the Friel v Dapper Labs decision, which was a first-of-its-kind  decision in the U.S. courts, holding that an NFT (non-fungible token) can be a security under U.S. securities law.  On August 28, 2023, the U.S. Securities and Exchange Commission brought its first NFT enforcement action, against Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles It read very much like the SEC’s actions concerning cryptocurrency.

As in those cases, the SEC stated that the Howey test was the touchstone for whether the NFTs were sold as an investment contract, and therefore securities.  The Howey factors are whether there is (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits; (iv) solely from the efforts of others.   SEC v. Howey, 328 U.S. 293, 298 (1946).

The SEC’s Order thus sought to establish these factors and stated as follows.  From October 13, 2021 to December 6, 2021, Impact Theory offered and sold crypto asset securities known as Founder’s Keys to the public in the form of NFTs.  Impact Theory sold 13,921 NFTs to  hundreds of investors, including investors in multiple states. In so doing, Impact Theory raised just under $30 million of ETH.  As to second factor, Impact Theory publicly shared its view that the fortunes of the NFT purchasers, Impact Theory, and Impact Theory’s founders were all linked together, with statements such as “NFTs are the mechanism by which communities will be able to capture economic value from the growth of the company that they support.”

Investment Theory was not shy with respect to the third factor, making statements such as “If you’re paying 1.5 [ETH], you’re going to get some massive amount more than that,” and, “Now as we’re building out this IP, imagine that you could’ve gotten in on Disney when they were doing Steamboat Willie.”  As to the fourth factor, the SEC said Impact Theory underscored that this purported value would be derived from the company’s efforts.  It referred to statements that Impact Theory would use the proceeds from the offering for “development,” “bringing on more team,” and “creating more projects.”

The order found that the NFTs offered and sold to investors were investment contracts and therefore securities. Thus, according to the SEC, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration, in violation of the registration provisions of the Securities Act of 1933.

In terms of the remedies, without admitting or denying the SEC’s findings, Impact Theory agreed to a cease-and-desist order finding that it violated the registration provisions of the Securities Act of 1933 and ordering it to pay more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty.  The Order also established a Fair Fund to return monies that injured investors paid to purchase the NFTs.  In addition, Impact Theory agreed to destroy all Founder’s Keys in its possession or control, publish notice of the order on its websites and social media channels, and eliminate any royalty that Impact Theory might otherwise receive from future secondary market transactions involving the Founder’s Keys.

The analysis in the Order was quite straightforward.  As has often been the case with SEC actions in the crypto space, the more thought-provoking issues were raised by Commissioner  Pierce in her Dissenting Statement (together with Commissioner Uyeda).  They said they shared a concern about the type of hype that entices people to spend almost $30 million for NFTs seemingly without having a clear idea about how they will use, enjoy, or profit from them. In their view, however, this legitimate concern is not a sufficient basis to bring the case under the jurisdiction of the SEC.  They said, “We 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.”

The Dissenting Statement also noted that the typical cure for a registration violation is a rescission offer.  That had happened here, in the form of repurchase programs under which the company bought back $7.7 million of NFTs.  Finally, in light of this being the SEC’s first NFT enforcement action, the Dissenting Statement identified nine questions that it thought needed to be answered:

  1. Non-fungible tokens are not an easy-to-characterize asset class, particularly because they can give the owner a wide array of rights to digital or physical assets. People are experimenting with a lot of different uses of NFTs. Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty. Are there useful ways for the Commission to categorize NFTs for purposes of thinking about whether and how the securities laws apply to offers and sales?
  2. If the Commission were to craft guidance for NFT creators seeking to understand potential intersections with the securities laws, what questions would be helpful for us to address?
  3. How should recent legislative efforts to construct a framework for crypto inform our thinking about the application of securities laws to NFTs?
  4. Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
  5. If a securities law regime is best, how could SEC registration requirements be tailored to reflect the unique nature of NFTs? Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the Commission’s objectives of protecting investors and the integrity of the marketplace?
  6. Does this action indicate that the Commission generally views previous NFT offerings as securities offerings? If so, will the Commission provide specific guidance to those issuers describing what they need to do to come into compliance?
  7. What, if any, restrictions should apply to secondary market sales of NFTs that the issuer sold as the object of an investment contract?
  8. This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
  9. The settlement includes an undertaking to “[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the KeyNFTs to eliminate any royalty.” Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?

A cynic might look at the situation and say this enforcement action is nothing more than the SEC’s continued effort to stake out the broadest possible jurisdiction over the entire cryptocurrency industry.  Another way to view the situation is that the case against Impact Theory can be viewed as simply a variation of the same theme the SEC has followed in its other crypto enforcement.  In that sense, the case is not any tectonic change.  In contrast to what Impact Theory was selling, much of the NFT market concerns art work and music — often geared to creators seeking a way to generate revenue in markets that are ever-changing.  Were the SEC to pursue this area, that would deserve significantly more attention than the Impact Theory case.  At the very least, however, the SEC has placed a stake in the ground with respect to NFTs; it will be interesting to follow its next steps, especially in the context of the questions raised in the Dissenting Statement. 


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.