Legal Alert

SEC Finds NFT to Be a Security in Landmark Action

by David L. Axelrod, Celia Cohen, Marjorie J. Peerce, Michael P. Robotti, and Nathaniel B. Botwinick
August 31, 2023


The SEC’s focus on the crypto industry expanded this week to include non-fungible tokens (NFTs). In its first NFT-enforcement action, the SEC settled with Impact Theory, a media and entertainment company, over allegations that it had engaged in an unregistered offering of securities through its sale of NFTs. This action is unlikely to be the only SEC enforcement action in this space.

The Upshot

  • The SEC continues to vigorously pursue crypto-assets as securities, and NFTs may be part of the next wave of SEC enforcement actions.
  • Impact Theory’s promises to investors about increasing the value of the NFTs, the company, and their collective fortunes appear to be the linchpin to the finding that they are securities. It remains to be seen, however, how the SEC will distinguish other NFTs that may be harder to depict as securities subject to SEC regulation.
  • Given that purchases of NFTs are often made as investments, this case is likely the first of many SEC cases involving NFTs.

The Bottom Line

The crypto industry already is facing increased SEC enforcement amid a murky regulatory environment. The SEC’s first case in the NFT-arena signals that the SEC is not slowing down, and companies in the crypto industry should engage experienced counsel to advise on navigating litigation, regulatory and compliance risks.

On August 28, 2023, the SEC charged and entered into a settlement with Impact Theory, LLC, finding that Impact Theory’s non-fungible token (NFT) was a security, and as a result, Impact Theory had engaged in an unregistered offering of a security. This is the first time that the SEC has brought an NFT-related enforcement action. NFTs are unique digital identifiers that may be used to certify authenticity and ownership of an associated right or asset. Ownership of an NFT may also provide its holder with a right to a digital file that is separate from the NFT or it may provide the holder with a right to an asset that is not a digital file, such as the ownership of a physical item.

According to the SEC, Impact Theory offered and sold three different types of NFTs called Founder’s Keys to investors. In advance of the offering of the NFTs, Impact Theory hosted live events and posted records on Discord, a communications platform, as well as shared information on its own websites and social media channels. In these events and statements, the SEC claims, Impact Theory invited potential investors to view the purchase of the NFTs as an investment in Impact Theory’s business that would result in profits for investors, if Impact Theory was successful. Impact Theory told potential investors that it was “trying to build the next Disney,” and the value of the NFTs would increase as a result. Impact Theory also stated that the fortunes of the NFT purchasers were linked with that of Impact Theory and its founders. As a result of Impact Theory’s statements, the SEC concluded that potential and actual purchasers of the NFTs believed the NFTs were investments that would appreciate in value. Indeed, the SEC quoted prospective and actual purchasers who declared that, “[t]his is like being offered to invest in a booming company when they’re Series A” or buying these NFTs “is [l]ike investing in Disney, Call of Duty, and YouTube all at once.”

Impact Theory sold 13,921 NFTs to investors and raised over $29 million worth of the crypto-token Ethereum (ETH) from the sales. Impact Theory used a portion of these proceeds to pay vendors providing services to Impact Theory’s business. The NFTs also traded on secondary markets following the offering, and Impact Theory’s code for the NFTs provided Impact Theory with a 10 percent royalty on each secondary sale, which generated an additional approximately $978,000 worth of ETH for Impact Theory.

As a result of this conduct, the SEC found that Impact Theory had violated Sections 5(a) and (c) of the Securities Act, which prohibit the unregistered offering of securities.

Prior to accepting the SEC settlement, Impact Theory undertook the remedial effort of repurchasing NFTs from investors, and repurchased approximately $7.7 million worth of NFTs. As part of its settlement with the SEC (Order), Impact Theory agreed to (1) destroy all NFTs in its possession or control within 10 days of the Order; (2) publish notice of the Order on its websites and social media; (3) revise the smart contracts in its NFTs to eliminate its royalties; and (4) pay disgorgement of $5,120,718.27, prejudgment interest of $483,195.90, and a penalty of $500,000. Impact Theory also consented to work with the SEC on distributing to “affected investors [this] monetary relief[.]”

Howey Analysis – Why Were the NFTs Securities?

As part of the Order, the SEC did not explicitly explain how the NFTs in question qualified as securities under the Howey test. In 1946, the Supreme Court established the standard for determining whether a particular economic arrangement can be classified as an “investment contract,” in other words a security, and thus regulated by the SEC. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey).

Under the Howey test, an “investment contract” under federal securities law is any “contract, transaction, or scheme whereby a person [(1)] invests his money [(2)] in a common enterprise and [(3)] is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99. Pursuant to the Order, the NFTs appear to qualify as securities because (1) investors purchased the NFTs using ETH for (2) a “common enterprise” whereby the investors’ fortunes were linked with that of Impact Theory and its founders, and (3) the investors expected profits from the efforts of Impact Theory to build the “next Disney.”

Commissioners Peirce and Uyeda’s Dissent

Immediately following the publication of the Order, SEC Commissioners Hester Peirce and Mark Uyeda issued a statement outlining their dissent. First, they questioned whether Impact Theory’s NFTs qualified as securities under Howey. In particular, they disagreed with whether the statements made by Impact Theory were sufficient promises that would lead investors to expect profits from an entity’s efforts. Peirce and Uyeda pointed out that the SEC does 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.”

Peirce and Uyeda also questioned whether an enforcement action is necessary even if the Howey test was met. They noted that registration violations are typically cured through a rescission offer, and Impact Theory already made that offer through their repurchase programs. Furthermore, Impact Theory had already paid investors $7.7 million worth of ETH, and other investors could have assumedly resold their NFTs back to the company. 

Finally, Peirce and Uyeda raised nine questions that they believe the SEC should consider for future NFT regulation and enforcement.


The SEC’s enforcement action against Impact Theory heralds a new world of SEC involvement in the NFT space. NFTs often exist in a different space than traditional crypto-assets, and it will be important to see how the SEC delineates between those that may be securities and those that are not. For example, NFT-based art has been growing a sector of the modern art market, and other NFTs have been used to grant access to social clubs. These would appear distinct from Impact Theory’s NFTs that allegedly were connected to investing in a startup.

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