In an enforcement action announced on Monday, the Securities and Exchange Commission charged Los Angeles–based entertainment company Impact Theory with conducting an unregistered offering of securities via non-fungible tokens, or Ethereum.
While Impact Theory did not admit or deny the SEC’s allegations, it agreed to a cease-and-desist order, as well as a $6.1 million fine in disgorgement, prejudgment interest, and a civil penalty. It will also return all proceeds from NFT sales to investors.
Two commissioners, Hester Peirce and Mark Uyeda, dissented, writing in a separate statement that they disagreed with the application of the Howey Test—a Supreme Court precedent that creates a framework for which assets are securities—and that the NFTs did not represent shares in a company or produce any type of dividend.
"The Commission should have grappled with these questions long ago and offered guidance when NFTs first started proliferating," they wrote.
It is unclear whether the enforcement action will be an opening salvo against the broader NFT industry; the SEC has yet to file any lawsuits against major players in the space, such as Dapper Labs. In October 2022, Bloomberg reported that the SEC was trying to prove whether Yuga Labs, creator of the popular Bored Ape Yacht Club NFT collection, was offering unregistered securities, although the agency has yet to bring charges.
The broader crypto industry frequently complains that SEC Chair Gary Gensler has engaged in a policy of “regulation by enforcement” by bringing lawsuits against firms without engaging in rule-making to clarify the agency’s jurisdiction or how companies can comply. Gensler has argued that the industry is “rife with fraud, scams, and abuse,” and that existing rules are sufficient.
