TL;DR: The SEC filed its first lawsuit against an NFT project, alleging unregistered securities sales. This could set a concerning precedent for regulation of other NFTs.
The crypto bear market has been brutal, with every niche crashing. Now NFTs, the last holdouts, are falling as regulators step in.
The SEC recently sued its first NFT project, which could foreshadow lawsuits against other collections. The outcome could establish a dangerous precedent for regulating expensive JPEGs.
Why Is This Lawsuit So Significant?
If you’ve followed crypto regulations, you know NFTs were the only area not facing major scrutiny. Most crypto rules trace back to the Financial Action Task Force (FATF), which omits NFTs as “virtual assets.”
Oddly, as NFT crime rises, the FATF ignores oversight, perhaps due to similarities with the unregulated fine art market. Either way, NFTs were a regulatory safe haven, theoretically resilient in the bear market.
While BTC and ETH crashed more than top NFTs in percentage terms, most collections are priced in ETH. In fiat terms, they’ve seen huge losses, but lacked an FTX-level collapse.
Bullish NFT updates continued, like SEC approval for a blockchain project to issue tokenized art. However, the SEC then sued its first NFT project, flipping sentiment bearish.
SEC vs. Impact Theory: Allegations and Evidence
The SEC targeted Founders Keys, created by Impact Theory, a media company behind a YouTube channel. The SEC settled with Impact Theory, though two Commissioners dissented.
In 2021, Impact Theory raised $27 million selling Founders Keys NFTs to US residents without registering with the SEC. It promised to use proceeds for development, making the NFTs unregistered securities.
Social media promotions compared owning the NFTs to investing in a startup’s early rounds. The SEC takes issue with Impact Theory using proceeds to fund operations rather than delivering a finished product upfront.
Royalties also drew scrutiny. Impact Theory earned nearly $1 million from 10% secondary sales royalties. The SEC reiterates these were unregistered securities sold illegally.
As punishment, Impact Theory must repay all funds. It spent $8 million on NFT buybacks for refunds. The settlement requires delisting all Founders Keys NFTs, removing royalties, and publishing an SEC announcement within 10 days.
However, the financial penalty was only $6 million, less than the full amount raised.
Impact Theory’s Response and SEC Dissent
In its settlement press release, Impact Theory expressed disappointment with the SEC’s crypto attitude. It promised future NFTs would be “collectibles with utility.”
Yet it proceeded to promote another upcoming NFT project leveraging its technology.
SEC Commissioners Hester Peirce and Mark Uyeda dissented, arguing the NFT sales did not constitute securities offerings despite promotions. They said the punishment was excessive.
This first NFT case raises many questions the SEC must answer, the Commissioners said.
What Does This Mean for the NFT Market?
This sets precedent for the SEC to target other projects in a similar fashion to past crypto enforcements. Other NFTs are far more promotional than Founders Keys.
As U.S. regulators scrutinize crypto, global entities often follow suit. NFTs could soon face far more regulatory heat, causing faster price declines than fungible cryptos.
NFT oversight may relate to digital ID and asset tokenization. Governments want all assets on permissioned blockchains they control. NFTs could compete with their centralized tokenized systems.
Expect more NFT regulations targeting this last bastion of freedom. We’ll keep readers updated on developments aiming to restrict open financial networks and limit individual economic sovereignty.
Thank you for reading “#SEC Sues NFT Project in First Enforcement Action Against Crypto Collectibles“.
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