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SEC’s Impact on NFTs Is More Than Theory: First Enforcement Action Against an NFT Creator

September 5, 2023


Non-fungible tokens, or NFTs, have been around for nearly a decade. Yet, until last week, the Securities and Exchange Commission has not brought any enforcement actions related to the offer and sale of NFTs. On August 28, a sharply divided SEC announced a $6 million settlement with Impact Theory, Inc., finding that the company’s offer and sale of a collection of NFTs known as Founder’s Keys (“KeyNFTs”) for a total of $30 million violated the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. Impact Theory settled the enforcement action on a without-admitting-or-denying basis.

For its first enforcement action addressing whether an NFT is a security, the SEC chose a case with fairly unremarkable facts. The SEC’s action, however, signals that the agency remains steadfast in its efforts to police offers and sales of what it considers to be digital asset securities—even after the recent partial grant of defendants’ motion for summary judgment in SEC v. Ripple Labs. No. 20 CV 10832, 2023 WL 4507900 (S.D.N.Y. July 13, 2023).

The SEC Order

As with many other enforcement actions involving digital assets, the SEC found that Impact Theory’s KeyNFTs were “investment contracts” under the Supreme Court’s Howey test. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (holding that an investment contract is a security when there is an “investment of money in a common enterprise with profits to come solely from the efforts of others”).

Impact Theory had sold KeyNFTs in three tiers with different price ranges for each. To support its conclusion that purchasers of KeyNFTs were led to expect profits, the SEC quoted extensively from promotional and marketing statements attributed to Impact Theory. For example, the SEC cited statements that Impact Theory said it was “trying to build the next Disney” and that those efforts, if successful, would deliver “tremendous value” to KeyNFT holders. The SEC’s Order also included statements on Discord that the SEC attributed to “prospective and actual purchasers” of KeyNFTs as evidence that those people believed that they were making an investment in Impact Theory.

According to the SEC, Impact Theory received almost $30 million from primary sales of KeyNFTs plus nearly $1 million in royalties from secondary sales of KeyNFTs.

As part of the settlement, Impact Theory agreed to pay more than $6 million in monetary relief, including a $500,000 civil penalty. The SEC’s Order notes that Impact Theory spent millions of dollars repurchasing KeyNFTs from the original buyers as well as secondary-market sellers. Impact Theory also agreed to destroy all KeyNFTs in its possession and revise its programming code to eliminate any royalties that Impact Theory could receive from future secondary-market sales.

The Republican Commissioners Dissent

Commissioners Hester Pierce and Mark Uyeda published a statement in dissent. They first challenged the proposition that KeyNFTs were investment contracts under the Howey test, noting that the KeyNFTs “were not shares of a company and did not generate any type of dividend for the purchasers.”

Commissioners Peirce and Uyeda criticized the SEC’s Order because it discusses only one of the four Howey prongs—the reasonable expectation of profits based solely on others’ efforts. They observed that the SEC has not brought enforcement actions in arguably analogous situations, such as when individuals sell watches, paintings, or collectibles “along with vague promises to build the brand and thus increase [their] resale value[s].” The dissenting commissioners also questioned the necessity of this enforcement action, given that the typical remedy for a registration violation is to offer to rescind the sale of the security, which Impact Theory had already done by offering to repurchase KeyNFTs.

Consistent with their view that rulemaking is needed, Commissioners Peirce and Uyeda raised nine questions that they believe the SEC “should have grappled with” before charging Impact Theory. Those questions fall into five categories:

  • Existence of SEC jurisdiction: Should the securities regime apply to all NFTs? To some of them? And, if so, which ones?
  • Consideration for NFT creators: What SEC guidance would be most helpful and workable to creators to understand how securities laws apply to NFTs?
  • Consideration for NFT purchasers: What information do NFT purchasers need before buying an NFT?
  • Structure of NFT marketplaces: Should there be restrictions on secondary-market sales of NFTs?
  • Consideration for creating precedent: Should it be standard in NFT actions for the SEC to call for a creator to destroy the NFTs in its possession and eliminate royalties—even if those NFTs represent unique pieces of digital art or music?


Like the agency’s early enforcement actions against creators of fungible tokens, the Impact Theory Order will not satisfy NFT creators who want greater clarity about how to comply with federal securities laws when offering and selling NFTs.

A settled order does not necessarily need to address in depth all issues it raises; for example, the ramifications of deeming some NFTs to be securities. And the few courts that have ruled on NFT-based securities claims have wrestled with applying Howey to this new technology and asset class. See, e.g., Friel v. Dapper Labs, Inc., et al., No. 21 CV 5837, 2023 WL 216747 (S.D.N.Y. Feb. 22, 2023) (denying motion to dismiss complaint alleging registration violations by the creator of NFTs known as NBA Top Shot Moments).

The Impact Theory Order underscores the importance of being careful when promoting NFTs. For example, the SEC found that Impact Theory stated that KeyNFTs holders would receive a “massive amount” of “value” beyond what they paid and that Impact Theory would invest sale proceeds in the “development” of the business to provide that value. Industry participants should be aware that those kinds of statements could draw SEC scrutiny.

Faced with the absence of any legislation or SEC rulemaking, and an aggressive SEC enforcement agenda, NFT creators and industry participants should work with experienced counsel who can help them navigate these treacherous and murky regulatory waters.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jorge deNeve, an O'Melveny partner licensed to practice law in California, Andrew J. Geist, an O'Melveny partner licensed to practice law in New York, William K. Pao, an O'Melveny partner licensed to practice law in California, Michele Wein Layne, an O'Melveny of counsel licensed to practice law in California, Bill Martin, an O'Melveny counsel licensed to practice law in New York, Jamie Quinn, an O'Melveny counsel licensed to practice law in California, and Britta A. Nordstrom, an O'Melveny associate licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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