On August 28, 2023, the SEC announced its first enforcement action against an NFT project, via a settled order as to Impact Theory, LLC (“Impact Theory”) for the offer and sale of unregistered securities.  However, absent from the order is any attempt to grapple with the unique issues presented by non-fungible tokens.  The SEC instead drafted an order that is almost indistinguishable from those it issued for initial coin offerings (“ICOs”).  In doing so, the SEC not only ignored elements of the NFT project at hand, but also avoided the complicating traits of many popular NFT projects, such as their inherent non-fungibility and collectability.

Impact Theory is a media and entertainment company that launched the “Founder’s Key NFT” project in October 2021.  According to the SEC’s order, the project included three tiers of NFTs (Legendary, Heroic, and Relentless), each sold at different prices.[1]  While not mentioned in the Commission’s order, each tier had its own set of potential benefits, including early and/or exclusive access to the Impact Theory content library, physical and virtual merchandise, and discounts on courses.[2]   In total, the company earned $30 million worth of ETH from all primary sales, plus an additional $1 million from a 10% royalty on secondary sales of the NFTs.[3]

To establish that offers and sales of the Founder’s Key NFTs were securities, the Commission used statements from the company and users to march through the Howey test for an investment contract, which requires: (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits; (4) based on the efforts of others.[4]  For instance, to establish there was an expectation of profits based on the efforts of others, the SEC quotes the company claiming that purchasing the NFTs is “an investment into the business” that would be profitable if the company “is successful in its efforts” to “build the next Disney.”[5]  And, potential and actual purchasers in the project’s Discord page were quoted as saying things such as, “[b]uying a founders key is Like investing in Disney, Call of Duty, and YouTube all at once.”[6]

As noted above, the settlement order is strikingly similar to orders that the SEC has issued against fungible digital assets, notably in the agency’s ICO cases.[7]  Despite Impact Theory’s reception as the “first enforcement action against an issuer of non-fungible tokens,”[8] the order sidesteps the difficult questions raised by transactions involving NFTs, focusing instead on issuer statements about the assets’ value proposition and future plans for the project.  While this focus on the respondents’ statements is understandable given that they explicitly characterized the NFT purchases as an investment in their business, it obscures the analytical challenges with applying the Howey framework to these transactions, other NFT transactions, and digital asset transactions generally.

First, the SEC failed to address the economic reality of these particular NFTs.  The agency ignored that each tier offered users access to Impact Theory content, discounts on Impact Theory classes, and eligibility to receive physical and virtual merchandise.[9]  This makes the NFTs in question more like membership passes, and less like the fungible ICO tokens that the order seems modeled on.  The promise of content also adds context to some of the statements the SEC’s order cherry-picks.  The references to Disney were made in the context of Impact Theory’s plans to create a content catalog with similar demand, and thus increasing the value of the NFTs that give people access to said content.  While some district courts have found that utility alone won’t save a fungible token project from being an investment contract,[10] the SEC ignores the issue entirely.

Second, by choosing Impact Theory, the SEC avoided other difficult questions raised by many popular NFT projects.  Within each of the three tiers, the Founder’s Key NFTs were largely fungible (though each displayed an image with a different combination of symbols and had a unique token ID).  But most other notable NFT projects, such as Pudgy Penguins,[11] involve thousands of NFTs that are completely distinct from one another in appearance and token ID.  Some tokens in the same collection can be worth 100 times or more than other tokens due to differences in their rarity and aesthetics, similar to certain baseball cards (or Beanie Babies) that are released around the same time.  These differences demonstrate the consumptive use of projects like Pudgy Penguins as digital collectibles, which presents problems for the SEC’s superficial analysis here.  The fact that tokens within the same project could result in dramatically different returns if sold, based entirely on the token’s perceived collectability or aesthetic qualities, also undermines any claim of vertical or horizontal commonality needed to demonstrate a common enterprise.[12]  Additionally, typical holders of an NFT project are not hoping to make money based on the economic performance of the company that released them, instead their profit would simply come from an increase demand in the collectible or artwork they hold.

Commissioners Hector Peirce and Mark Uyeda emphasized this point in their dissent, discussing how, despite the comparisons to Disney or YouTube, the Founder’s Key NFTs “were not shares of a company and did not generate any type of dividend for purchasers.”[13]  They also touched on the connection to collectibles, writing that the SEC does 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.”[14]  The fact that the Founder’s Key NFTs provided certain purchasers with exclusive access to limited edition content and physical merchandise certainly casts the marketing statements quoted in the order in a different light, and it is notable that the majority of the Commissioners chose to ignore this context. While the dissenting commissioners expressed concerns about how the project was marketed, they also emphasized that NFTs raise difficult questions for the Commission that were not answered in this action and should be answered before additional enforcement actions against NFT projects.

As part of the settlement, Impact Theory agreed to pay disgorgement and interest of $5.6 million, in addition to $7.7 million it previously provided to purchasers as part of two buyback programs, plus a $500,000 fine.  They also agreed to various undertakings, including the destruction of any NFTs they controlled, publishing notice of the order on their websites and social media, and eliminating the 10% royalty on secondary sales.[15]  In their dissent, Commissioners Peirce and Uyeda also questioned whether obtaining these remedies justified the enforcement action.  They noted that the “typical cure for a registration violation is a rescission offer” and pointed out that Impact Theory’s buyback programs already served that function.[16]  The requirement that Impact Theory eliminate the 10% royalty on secondary sales that was part of the original smart contract that created the Founder’s Key NFTs raises separate concerns.  The dissenting Commissioners note that this requirement seems to undermine one of the core value propositions of NFTs, that they allow creators to earn rewards automatically, and it effectively rewrites the “terms” in the implied contract the Commission necessarily found in its Howey analysis.  The undertaking also raises questions about what projects with less control over their smart contract code will do if required to take similar actions.

Overall, this settlement order, like many SEC crypto-related actions, answers few questions about how the SEC thinks about NFTs broadly and the conclusions they may draw about other projects.  Thus, other than knowing now that the SEC views at least some NFTs to be within its regulatory orbit,[17] the blockchain industry once again enters unknown regulatory territory.


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[1] Order ¶ 4.

[2] Impact Theory Founder’s Key, https://founderskey.io.

[3] Order ¶¶ 10–11.

[4] Id. at ¶¶ 4–11.

[5] Id. at ¶ 6.

[6] Id. at ¶ 8(C).

[7] See, e.g., In re Blockchain of Things, Inc., Securities Act Release No. 10736 (Dec. 18, 2019), https://www.sec.gov/litigation/admin/2020/33-10755.pdf.

[8] Dave Michaels, SEC Settles First NFT Enforcement Action, Wall St. J., Aug. 28, 2023, https://www.wsj.com/livecoverage/stock-market-today-dow-jones-08-28-2023/card/sec-settles-first-nft-enforcement-action-against-media-company-impact-theory-bzxM1xPolcUbKN57DyuC.

[9] Impact Theory Founder’s Key, https://founderskey.io.

[10] SEC v. LBRY, Inc., No. 21-CV-260, 2022 WL 16744741, at *7–8 (D.N.H. Nov. 7, 2022).

[11] Pudgy Penguins is an NFT collection where each NFT displays an image of a cartoon penguin with a combination of different features that contribute to its rarity within the collection.  The NFT collection is part of a larger brand that also “produces content, merchandise, [and] toys.”  See Pudgy Penguins, https://pudgypenguins.com.

[12] In these collections, purchasers “could make profits or sustain losses independent of the fortunes of other purchasers,” which cannot if there is horizontal commonality. Revak, 18 F.3d at 88. The “rate of return” is also not “entirely a function of the rate of rate of return shown by” the pooling of all purchasers’ funds.  Savino v. E. F. Hutton & Co., 507 F. Supp. 1225, 1236 (S.D.N.Y. 1981) (emphasis added).  Lastly, there would be no vertical commonality because the lack of alignment between the profits of different purchasers means they necessarily cannot all be aligned with the project owners.

[13] Id.

[14] NFTs & the SEC: Statement on Impact Theory, LLC, https://www.sec.gov/news/statement/peirce-uyeda-statement-nft-082823.

[15] Order at ¶ 17.

[16] NFTs & the SEC: Statement on Impact Theory, LLC, https://www.sec.gov/news/statement/peirce-uyeda-statement-nft-082823.

[17] Notably, the Commission did not bring insider trading charges against the individual charged criminally with trading ahead of the listing of NFTs on OpenSea.


Stephan Schlegelmilch is a litigation counsel based in the firm’s Washington, D.C. office and a member of the firm’s White Collar & Regulatory Defense Group. He can be reached at sjschlegelmilch@debevoise.com.


Ben Leb is an associate in the Litigation Department. He can be reached at bjleb@debevoise.com.


Ben Stadler is an associate in the Litigation Department. He can be reached at bstadler@debevoise.com.