SEC has decided to double down on enforcement against unregistered NFT offerings. While the Stoner Cats NFTs were classified as unregistered securities, the same decision was reached for Impact Theory.
SEC sanctions will increase
The U.S. Securities and Exchange Commission (SEC) announced two enforcement actions against NFT platforms Impact Theory and Stoner Cats 2 in connection with unregistered offerings of cryptocurrency asset securities. In both enforcement actions, the SEC determined that NFTs were securities under the Howey Test.
On August 28, 2023, the agency accused Impact Theory, a Los Angeles-based media and entertainment company, of engaging in an unregistered NFT offering in violation of federal securities laws. According to the SEC, Impact Theory marketed these NFTs as investments, implying that investors would profit if it was successful in its efforts. The SEC concluded that these NFTs were investment contracts and therefore securities under the Howey test. Impact Theory and the Securities and Exchange Commission entered into a memorandum of understanding resolving the claims in exchange for the payment of damages, interest and civil penalties totaling approximately $6 million.
On September 13, 2023, the SEC doubled down on its enforcement in the NFT space, accusing SC2 of running an unregistered NFT offering that raised nearly $8 million from investors to fund an animated web series called Stoner Cats. According to the SEC, on July 27, 2021, SC2 offered and sold more than 10,000 NFTs at approximately $800 each, selling in just 35 minutes, generating approximately $8.2 million in revenue.
Clear regulation is a must
The Commission found that SC2 offered and sold Stoner Cats NFTs as investment contracts; It found that under the Howey test, Stoner Cats was required to register the offer and sale of its NFTs with the SEC. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that “it is the economic reality of the offering that guides the determination that something is an investment contract and therefore a security, not the labels or underlying objects you put on it.” In this case, SC2’s marketing practices and promises of potential profits led the SEC to classify Stoner Cats NFTs as unregistered securities.
In both cases, SEC Commissioners Hester M. Peirce and Mark T. Uyeda disagreed, calling for greater clarity for artists and other creators looking to explore the NFT space. On the other hand, this clear difference of opinion among the commission members underlined the need for clear regulations rather than regulation through implementation.
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