The Securities and Exchange Commission (SEC) has charged Los Angeles-based media company Impact Theory with offering and selling unregistered securities in the form of crypto asset tokens. Notably, this marks the SEC’s first lawsuit targeting an NFT offering.

SEC Sues Impact Theory Over $30M in NFT Sales

From October 2021 to December 2021, Impact Theory raised nearly $30 million by selling non-fungible tokens (NFTs) called Founder’s Keys without filing a registration statement or qualifying for an exemption, the SEC complaint details. The SEC found that the company violated Sections 5(a) and 5(c) of the Securities Act.

The SEC order states that Impact Theory offered and sold NFTs known as Founder’s Keys at three pricing tiers, describing them as an investment opportunity and promising “tremendous value” to purchasers. Impact Theory compared the investment potential to investing early in successful companies like Disney and Youtube, claiming the proceeds would fund business growth to enrich token holders. However, the company did not register the tokens as securities or qualify for an exemption.

“Absent a valid exemption, offerings of securities, in whatever form, must be registered,” Antonia Apps, director of the SEC’s New York Regional Office stated in the regulator’s press release. “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.”

Impact Theory sold nearly 14,000 Founder’s Keys to at least hundreds of investors across the U.S., raising almost $30 million worth of ether cryptocurrency. The company pooled the proceeds in a crypto wallet and used some funds to pay vendors. After the unregistered offering began, Founder’s Keys also traded on secondary markets where Impact Theory programmed the tokens to earn royalties from sales.

As a result of failing to register the securities or qualify for an exemption, the SEC found Impact Theory violated federal securities laws. The company agreed to pay over $6 million in disgorgement, interest, and penalties without admitting or denying the findings. Impact Theory also agreed to destroy tokens in its possession and revise the NFT smart contract code to remove royalties.

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