SEC Doubles Down On Enforcement Against Unregistered Offerings Of NFTs – Fin Tech

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In the past two weeks, the U.S. Securities and Exchange
Commission (“SEC”) announced two enforcement actions
against non-fungible token (“NFT”) platforms Impact
Theory, LLC (“Impact Theory”) and Stoner Cats 2, LLC
(“SC2”), in connection with their unregistered offering
of cryptocurrency asset securities. In both enforcement actions,
the SEC determined that the NFTs were securities under the
Howey Test.

On August 28, 2023, the SEC charged Impact Theory, a media and
entertainment company based in Los Angeles, with conducting an
unregistered offering of NFTs, in violation of the federal
securities laws. According to the SEC, Impact Theory marketed these
NFTs as investments, implying that investors would profit if Impact
Theory succeeded in its endeavors. The SEC concluded that these
NFTs were investment contracts and, thus, securities under the
Howey test. Impact Theory and the SEC entered into a
consent decree settling the allegations for an aggregate payment of
approximately $6 million in disgorgement, interest, and civil
monetary penalties.

On September 13, 2023, the SEC doubled down on its enforcement
in the NFT space, charging SC2 with conducting an unregistered
offering of NFTs that raised approximately $8 million from
investors to finance an animated web series called Stoner Cats.
According to the SEC, on July 27, 2021, SC2 offered and sold over
10,000 NFTs for about $800 each, selling out in just 35 minutes,
generating proceeds of approximately $8.2 million. The SEC found
that SC2 offered and sold the Stoner Cats NFTs as investment
contracts and pursuant to the Howeytest, it was required
to register the offer and sale of the Stoner Cats NFTs with the
SEC. Gurbir S. Grewal, Director of the SEC’s Division of
Enforcement, emphasized that “it’s the economic reality of
the offering – not the labels you put on it or the underlying
objects – that guides the determination of what’s an
investment contract and therefore a security.” In this case,
SC2’s marketing practices and promises of potential profit led
the SEC to classify Stoner Cats NFTs as securities, which were not

Notably, in both cases SEC Commissioners Hester M. Peirce and
Mark T. Uyeda dissented, calling for more clarity for artists and
other creators who want to explore the NFT space. This open
dissension among SEC Commissioners underscores the need for clear
regulations rather than regulation by enforcement.

This article is presented for informational purposes only
and is not intended to constitute legal advice.

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