In the past two weeks, the U.S. Securities and Exchange Commission (“SEC”) announced two enforcement actions against non-fungible token (“NFT”) platforms Impact Theory, LLC (“Impact Theory”) and Stoner Cats 2, LLC (“SC2”), in connection with their unregistered offering of cryptocurrency asset securities.  In both enforcement actions, the SEC determined that the NFTs were securities under the Howey Test.   

On August 28, 2023, the SEC charged Impact Theory, a media and entertainment company based in Los Angeles, with conducting an unregistered offering of NFTs, in violation of the federal securities laws.  According to the SEC, Impact Theory marketed these NFTs as investments, implying that investors would profit if Impact Theory succeeded in its endeavors.  The SEC concluded that these NFTs were investment contracts and, thus, securities under the Howey test.  Impact Theory and the SEC entered into a consent decree settling the allegations for an aggregate payment of approximately $6 million in disgorgement, interest, and civil monetary penalties.

On September 13, 2023, the SEC doubled down on its enforcement in the NFT space, charging SC2 with conducting an unregistered offering of NFTs that raised approximately $8 million from investors to finance an animated web series called Stoner Cats.  According to the SEC, on July 27, 2021, SC2 offered and sold over 10,000 NFTs for about $800 each, selling out in just 35 minutes, generating proceeds of approximately $8.2 million.  The SEC found that SC2 offered and sold the Stoner Cats NFTs as investment contracts and pursuant to the Howey test, it was required to register the offer and sale of the Stoner Cats NFTs with the SEC.  Gurbir S. Grewal, Director of the SEC's Division of Enforcement, emphasized that “it’s the economic reality of the offering - not the labels you put on it or the underlying objects – that guides the determination of what’s an investment contract and therefore a security.”  In this case, SC2’s marketing practices and promises of potential profit led the SEC to classify Stoner Cats NFTs as securities, which were not registered.

Notably, in both cases SEC Commissioners Hester M. Peirce and Mark T. Uyeda dissented, calling for more clarity for artists and other creators who want to explore the NFT space.  This open dissension among SEC Commissioners underscores the need for clear regulations rather than regulation by enforcement.

Authors: Mark Bini, Wardah Bari, Kaela Dahan, Courtney Fisher and Victoria Jaus