The year 2023 will forever be remembered as the year the U.S. Securities and Exchange Commission (SEC) went to war with crypto.
Determining who is truly trying to innovate a new and exciting financial category, versus who is a digital asset scam artist, remains among the central questions circling the crypto space.
This, as the agency on Monday (Aug. 28) charged Impact Theory, LLC, a media and entertainment company headquartered in Los Angeles, for holding an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs), raising $30 million in the process.
Per the SEC’s order, the three tiers of NFTs offered and sold by Impact Theory were subject to U.S. securities laws and therefore should have been registered and regulated by the Commission.
“The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration,” the agency wrote in a statement.
“Although we are disappointed that the SEC has chosen to broadly question the exciting technical innovations that make digital assets possible through the lens of the securities laws … We will operate our go-forward business consistent with our good faith best understanding of all applicable laws, rules, and regulations, will make clear that all of Impact Theory’s digital assets are collectibles with utility,” tweeted Impact Theory Co-founder Tom Bilyeu in response to the news.
Without admitting or denying the SEC’s allegations, Bilyeu’s company agreed to pay combined penalties of about $6.1 million as part of a settlement with the agency, as well as destroy the NFTs in question.
And 2023 may very well also go down as the year that the NFT industry learned the hard way that scarcity value is not enough to underpin a real business model.
While the SEC alleged that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key NFT as an investment into the business from which they would profit, therefore qualifying the digital assets as a security, the agency’s findings did not extrapolate from Impact Theory’s NFT offering to the broader NFT sector.
While the action does not suggest that the regulator considers all NFTs to be securities, it still sets a precedent, and two SEC commissioners, Hester Peirce and Mark Uyeda, dissented.
“We dissented in part because we disagreed with the application of the Howey analysis. Regardless of what one thinks of the Howey analysis, this matter raises larger questions with which the Commission should grapple before bringing additional NFT cases,” the two commissioners wrote in a statement.
“The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items,” Peirce and Uyeda added.
After all, for all the hubbub they created around the turn of the last century, fad collectibles like Beanie Babies were, for their part, never designated as securities.
As reported by PYMNTS, the SEC on June filed 13 charges against the world’s largest crypto exchange Binance, and its founder, Changpeng Zhao, claiming the platform “engaged in an extensive web of deception.”
The following day, the SEC sued publicly listed crypto exchange Coinbase, a Binance peer, claiming that the platform had allowed users to trade unregistered securities. Both companies have said they will fight the SEC’s charges.
“The crypto community believed and had a real conviction what they were doing was so new that existing laws could not possibly apply to them,” Amias Gerety, partner at QED Investors, told PYMNTS. “Once you have that conviction, then you start searching for excuses not to comply.”
But the SEC’s regulation by enforcement track record is not without blemishes. After all, the agency is tasked with enforcements and cannot write the laws themselves. Each of its actions must hold up in court before they are considered to be viable.
Cryptocurrency company Ripple last month (July 13) defeated many crucial elements of a SEC enforcement case against its sale of over $1.4 billion of its own XRP digital tokens, in a landmark ruling that somewhat dulled the sharp teeth of the SEC’s ongoing existential threat to the crypto industry in America.
Ripple intends to host a party in New York City on Sept. 29 to celebrate the court victory.
Separately, the U.S. District of Columbia Court of Appeals on Tuesday (Aug. 29) ruled that the agency should not have rejected crypto firm Grayscale Investment’s application to list an ETF (exchange-traded fund) that tracks the price of bitcoin.
“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” Circuit Judge Neomi Rao wrote.