Impact Theory Will pay a total of $6.1 million and will discontinue the selling of Founders’ Keys, which the SEC calls as unregistered securities in the form of NFTs.
On Monday, August 28, the US Securities and Exchange Commission (SEC) charged Los Angeles-based media and entertainment company Impact Theory over the unregistered securities sales of non-fungible tokens (NFTs) to investors, back in October and November 2021. Impact Theory produces entertainment and educational content, involving podcast episodes. As per the SEC, the company has allegedly raised over $30 million via NFT sales in the form of Founder’s Keys. The federal securities regulator said:
The company “encouraged potential investors to view the purchase of a Founders Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Impact Theory emphasized that it was ‘trying to build the next Disney,’ and, if successful, it would deliver ‘tremendous value’ to Founder’s Key purchasers.”
Without either acknowledging or refuting the SEC’s conclusions, Impact Theory has consented to a cease-and-desist order that acknowledges its infringement of the Securities Act of 1933’s registration provisions. As a result, it will pay a cumulative sum exceeding $6.1 million, encompassing disgorgement, prejudgment interest, and a civil penalty.
Furthermore, the SEC proposes creating a Fair Fund to reimburse investors who suffered losses due to their acquisition of the NFTs. As part of the resolution, Impact Theory has committed to destroying all of its held or controlled Founder’s Keys, making the order public on its websites and social media platforms, and relinquishing any potential royalties from future secondary market transactions involving the Founder’s Keys.
Destroying Founders Keys NFT
The SEC in its announcement said that Impact Theory will destroy Founders Keys NFTs in its “possession or control”. Additionally, they would also post a notice on its website and across social media channels informing its followers about the same.
Republican Commissioners Hester Peirce and Mark Uyeda voiced their opposition to the agency’s action, asserting that it prompts significant inquiries the Commission should address before pursuing further NFT cases.
In addition, they expressed their dissent concerning the application of the Howey Test. The SEC employs the Howey Test, a legal standard established by a 1946 US Supreme Court case, to aid in assessing whether transactions constitute investment contracts and are thereby subject to securities regulations. In a statement, Pierce and Udeya said:
“The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. 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.”
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