Is the SEC Coming for Your NFT Project?
Is the SEC Coming for Your NFT Project?
Web3 leaders, take note: The SEC's recent moves against NFT projects marks a significant pivot in how the U.S. regulates NFTs. Here’s what you need to know.
Dear Readers,
I've studied the regulatory orders so you don’t have to. Here's what you need to know.
Let's dive in👇
PS: Catch a list of top reads on NFT regulation at the bottom.
The Two Cases
Impact Theory 🖼️
On Aug 28, the SEC charged Impact Theory, an LA-based media company, for selling unregistered securities via NFTs, raising about $30 million. The company agreed to a $6.1 million fine. Link to case
Key SEC Claims:
Profit Expectation: Impact Theory promised NFT buyers “tremendous value,” insinuating profit.
Quote from the order: “If you’re paying 1.5 [ETH], you’re going to get some massive amount more than that. So no one is going to walk away saying, ‘Oh man, I don’t think I got value here.’”
“Its like investing 10k with a 300k upside, for a small risk.”
Business Funding: The firm used sale proceeds to finance operations.
Resale Royalties: It enabled NFT trading on secondary markets, collecting a 10% royalty.
Stoner Cats 🐱
On Sep 13, the SEC charged Stoner Cats, backed by Mila Kunis and Aston Kutcher, for the same violation. Link to case
Key SEC Claims:
Profit Expectation and Business Funding: Stoner Cats led buyers to expect rising NFT values if the related web series succeeded.
Unlimited Purchasing: No limit existed on how many NFTs one could buy, although one sufficed for project access.
Resale Royalties: It enabled trading of NFTs on secondary markets, earning royalty fees (2.5%), and therefore profiting of the value appreciation of its NFTs.
This was a key statement from Gurbir S. Grewal, Director of the SEC’s Division of Enforcement:
“Regardless of whether your offering involves beavers, chinchillas or animal-based NFTs, under the federal securities laws, 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.”
Why This Matters
This is the first time the SEC has enforced NFT projects – a category of digital assets that has avoided the eye of the regulators up to now (at least in the US).
Reading through the case shows that this could potentially apply to a lot of other NFT projects too.
This pushes the entire NFT space into murky waters.
Unanswered questions include:
Are NFTs securities (and therefore subject to SEC regulations)?
Are NFTs collectibles or investments?
Should NFT issuers disclose more information on their projects and how they plan to use the proceeds from sales?
The SEC appears to be gearing up for more aggressive oversight, nearly doubling its staff overseeing crypto assets, including NFTs.
In October last year, Bored Ape and Crypto Punk IP holder Yuga Labs faced an SEC probe over unregistered offerings.