The U.S. Securities and Exchange Commission today charged Impact Theory LLC, a Los Angeles-based entertainment company, for selling unauthorized securities for the company’s sale of nonfungible tokens in 2021, the first time the SEC has taken action against a company selling NFTs.

Between October and December 2021, Impact Theory offered three tiers of NFTs known as “Founders Keys” under the names “Legendary,” “Heroic” and “Relentless.” NFTs are digital collector items or artworks that exist on the blockchain and, during their peak a few years back, were pitched as the next big thing and an investment opportunity.

Although NFTs are often compared to art collecting, not all NFTs are the same, with some offering additional benefits and access. Someone selling a digital piece of art is clearly not selling a security, but where Impact Theory got into trouble is how they were marketed.

According to the SEC, Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business as opposed to buying art or a collectible, stating that investors would profit from their purchases if Impact Theory were successful in its efforts. The company is also said to have emphasized that it was “trying to build the next Disney” and, if successful, it would deliver “tremendous value” to Founder’s Key purchasers.

Given that the promised extras sounded a lot like a pitch for an investment product, that’s exactly how the SEC ruled, finding that the NFTs offered and sold to investors by Impact Theory were investment contracts and, therefore, securities.

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

Without admitting or denying the SEC’s finding that it violated the registration provisions of the Securities Act of 1933, Impact Theory has agreed to a cease-and-desist order and has paid $6.1 million to settle the matter. Under the agreement, Impact Theory has also agreed to establish a “Fair Fund” to return money to investors who had purchased the company’s NFTs, to destroy all Founder’s Keys in its possession, and to publish a notice of the order on its websites and social media channels.

Image: Impact Theory/Founder’s Key