The Securities and Exchange Commission (SEC) brought two highly controversial enforcement actions against nonfungible token (NFT) issuers for so-called "unregistered offerings of securities." The two orders bring further uncertainty to an already murky regulatory environment for digital assets and leave the public wondering how broad SEC jurisdictional reach really is.

Enforcement action against Impact Theory LLC

On August 28, 2023, the SEC issued a cease-and-desist order against Impact Theory, LLC (Impact Theory) for offering and selling certain NFTs that the SEC found to be investment contracts, and therefore, securities, under the Howey test. Impact Theory offered and sold three tiers of NFTs known as Founder's Keys (KeyNFTs) to the public from October to December 2021. The SEC alleged that, through public statements and hosted events, Impact Theory encouraged potential "investors" to view the purchase of these NFTs as an investment in the business. These statements included those by both the company and purchasers that Impact Theory was "trying to build the next Disney," and, if successful, Impact Theory would deliver "tremendous value."

Impact Theory had also programmed the smart contract for the NFTs such that Impact Theory received a ten percent royalty whenever a secondary market transaction took place. The SEC believed this royalty provided an incentive to encourage secondary market purchases and sales, although the royalty was paid back to Impact Theory, not the NFT holders. While these statements and others certainly created hype around the sale of the NFTs, are these statements really enough to form an investment contract? The NFTs did not represent equity in the company and did not provide for any liquidation, distribution, or other share-like rights.

Further, the SEC's stated mission is to "protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation". As the Commissioners' dissent highlighted (discussed in more depth below), a registration violation is typically cured by a recission offer. Impact Theory already offered to repurchase the NFTs from primary and secondary market purchasers at two different times. Who is an enforcement action in this situation protecting?

Enforcement action against Stoner Cats 2 LLC

A few weeks later, on September 13, 2023, the SEC issued a similar cease-and desist order against Stoner Cats 2 LLC (SC2), also on the theory that SC2 conducted an "unregistered offering of crypto asset securities" in the form of NFTs. SC2 offered and sold NFTs that funded the production of an animated series—Stoner Cats. Each NFT purchaser received a unique image of one of the characters from the series, exclusive access to view the six-episode series, the ability to interact with its private online community and other future entertainment content.

Again, the SEC focused on public statements made by SC2 to persuade "investors" that the price of their NFTs would increase and that they would profit from selling these NFTs in the secondary market. The NFTs here also included a royalty paid back to SC2 for any transaction on a certain secondary market platform. The SEC alleged that the royalties created incentives for SC2 to encourage individuals to buy and sell the NFTs in the secondary market. The SEC alleged these investors had a "reasonable expectation of obtaining a profit based on SC2's managerial and entrepreneurial efforts." However, the SEC also notes that one hundred percent of the royalties were paid out to the actors, artists and others working on the SC2 project, and the NFTs did not represent equity in SC2 nor provide for any liquidation, distribution, or other share-like rights.

SEC Commissioners' dissents

SEC Commissioner Hester M. Pierce and Commissioner Mark T. Uyeda issued a dissent to each of the enforcement actions against Impact Theory and SC2. The Commissioners highlight numerous questions that stem from these orders. For example,

  • Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
  • If a securities law regime is best, how could SEC registration requirements be tailored to reflect the unique nature of NFTs? Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the SEC's objectives of protecting investors and the integrity of the marketplace?
  • Do these enforcement actions indicate that the SEC generally views previous NFT offerings as securities offerings? If so, will the SEC provide specific guidance to those issuers describing what they need to do to come into compliance?
  • This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
  • The settlement for Impact Theory also includes an undertaking to "[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the NFTs to eliminate any royalty." Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?

The Commissioners argue that while they understand the concern for the hype that was created around these NFT sales, the SEC's application of the securities laws here "makes little sense and discourages content creators from exploring ways to harness social networks to create and distribute content." It further adds to the already confusing legal and regulatory environment facing artists, musicians, filmmakers and other creators.

Are sneakers and sports memorabilia next?

These SEC enforcement actions not only highlight the ambiguity and arbitrariness of the SEC's thinking with respect to crypto asset securities, NFTs and other digital assets, it also raises questions more broadly on the SEC's jurisdictional reach.

Similar to how the Commissioners describe in their dissent the hype around Star Wars collectibles sold in the 1970s, consider Sneaker Company X. Company X has a large, loyal following, and announces it will be doing a special limited edition release of its new line of X sneakers. Each sneaker will have a slight variation to the others in the release. Company X makes numerous posts on its various social media accounts regarding the sneaker release and customers line up outside its stores for hours before the sneakers go on sale. Company X uses the profits from the sneaker sales to hire more employees and further develop the X brand. The X sneakers sell out in under an hour and within a day the sneakers are being sold online for multiples of the initial customers' purchase price. Did Company X conduct an unregistered offering of securities? If not, how do you distinguish between the sneakers here and the NFTs sold by Impact Theory and SC2?

Taking another real life example, the Philadelphia Eagles recently announced they were re-adopting the Kelly Green color. They posted numerous hype videos on their social media accounts, their key players were shown wearing Kelly Green apparel and they promoted their first limited edition sale of its Kelly Green memorabilia. Birds fans lined up at the Linc overnight to be the first in line to purchase such memorabilia. Assume the Eagles used the profits from such sales to enhance player development and hire staff. If the Eagles made comments to the public that this memorabilia would increase in value and it was immediately seen being sold for three times as much on secondary market sites, did the Eagles conduct an unregistered offering of securities? If not, how do you distinguish between the memorabilia here and the NFTs sold by Impact Theory and SC2?


While certain sales of NFTs may very well implicate the securities laws, the subjective nature of these NFT enforcement actions highlight the need for the SEC to issue clear guidance and answer numerous open questions regarding digital assets. The SEC's continued approach of regulation by enforcement is unsustainable for a successful digital assets industry in the US.


Global Head of Private Wealth
Senior Associate
Of Counsel
Head of White-Collar and Co-Head of RISC, United States

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