Two SEC commissioners dissented and urged the Commission to provide further guidance on non-fungible tokens ("NFTs").

The U.S. Securities and Exchange Commission has brought its first enforcement action against sellers of NFTs.

Impact Theory, the seller, agreed to settle the matter with the SEC by, among other things, destroying the NFTs and paying more than $6 million in disgorgement, prejudgment interest, and penalties. In reaching this agreement, the SEC credited Impact Theory for previously instituting a repurchase program through which it returned roughly $7.7 million to the buyers.

This enforcement action follows similar actions by state securities regulators against other NFT sellers that we discussed in a previous Commentary, "Texas and Alabama Securities Regulators File Enforcement Actions Against Online Casino Developer Selling NFTs to Operate Casinos in a Metaverse."

The order focuses on Impact Theory's sale of KeyNFTs. The SEC asserted that these NFTs are "investment contracts"-and thus, securities-under SEC v. Howey, and alleged that Impact Theory violated Sections 5(a) and 5(c) of the Securities Act of 1933 by offering and selling these securities without registering with the SEC or qualifying for an exemption.

In the order, the SEC highlighted Impact Theory's public statements that the NFT proceeds would be reinvested into the business from the company's own efforts and would deliver "tremendous value" to the purchasers. The SEC also focused on the NFT buyers' statements, concluding that they viewed the NFTs as investments in the company.

Two SEC commissioners dissented because they disagreed with the Howey analysis and also because the matter "raises larger questions with which the Commission should grapple before bringing additional NFT cases." The dissent called for more concrete NFT guidance from the SEC and posed several questions to "help the Commission to approach the topic sensibly."

The order presents important implications for NFT sellers. First, if a company's NFTs are securities, then they become subject to a host of additional statutory and regulatory requirements. Second, the order suggests more aggressive SEC scrutiny of NFT sales.

As the dissent points out, NFTs are not "an easy-to-characterize asset class." They can serve a variety of functions, many of which do not resemble securities. But the SEC continues to view its regulatory authority over digital assets broadly. Before selling NFTs, companies should seek guidance from qualified legal counsel.

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