SEC Takes Aim at NFTs: First Enforcement Action Against Impact Theory

Yesterday the SEC announced that they had taken an enforcement order against Impact Theory, the popular podcast company owned by entrepreneur Tom Bilyeu.

The SEC claims that Impact Theory’s NFT called “Founder’s Key” constitutes an investment contract as per the Howey Test.

Around $30 million worth of NFTs were sold to investors. The SEC alleges that Impact Theory encouraged investors to consider their purchase of Founder’s Key NFTs as an investment in the company. As well as this, they were promised potential profits if the business succeeded.

In their press release, the SEC cited an example of one investor’s expectations, who allegedly said that “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once.” It also noted that Impact Theory said on many occasions that they were trying to build the next Disney.

Without acknowledging fault, Impact Theory consented to a cease-and-desist directive from the SEC. The order concluded that the company violated Securities Act of 1933 registration regulations and mandated payment of over $6.1 million in disgorgement, prejudgment interest, and a civil fine. Additionally, a Fair Fund was established to reimburse investors for payments made toward NFT purchases.

As part of the settlement, Impact Theory committed to destroying all held Founder’s Keys, posting the order on its digital platforms, and relinquishing any potential royalties from future secondary market transactions involving the NFTs.

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This is the first time the SEC has found that NFT issuers violated securities laws. However, the SEC noted that NFTs are a grey area that requires further discussion. Not all of the commissioners agreed with the Impact Theory decision either. Commissioners Peirce and Uyeda issued their dissenting opinion on the matter, stating the following:

“We share our colleagues’ worry 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. This legitimate concern, however, is not a sufficient basis to pull the matter into our jurisdiction… 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”.