SEC Opens A New Can Of Worms With NFT Enforcement Action

The U.S. Securities and Exchange Commission has taken its first enforcement action against non-fungible tokens, widening its assault on cryptocurrencies and raising a host of questions for issuers, exchanges, buyers and sellers of digital assets that can be used to transfer ownership of anything from artworks to real estate.

The agency targeted Impact Theory, an entertainment company that raised $30 million from hundreds of investors with the sale of Founders Keys, which offered a number of exclusive opportunities to holders, including discounts and early access to videos and gaming content.

The SEC alleged that promotional and marketing materials for the collection of nearly 14,000 NFTs characterized them as investments to the company, stating that buyers would “profit from their purchases if Impact Theory was successful in its effort.”

The company settled with the SEC without admitting or denying the charges and was ordered to destroy all of its NFTs and pay a $6 million fine to the agency.

The Impact Theory case was easy pickings for the SEC, says James Walker, co-lead of the fintech compliance and enforcement team at New York-based law firm Perkins Cole. “At least from the facts presented, they pretty much did everything that you shouldn’t do.”

But exactly what is permissible in NFTs–which like cryptocurrencies exist on blockchains but which are not all identical–is an open question.

“The SEC likes to pick enforcement actions and kind of stand them up as archetypes, knowing that they’re not binding legal precedent,” says Rodrigo Seira, special counsel at crypto venture capital firm Paradigm. “But it’s like a pseudo-doctrine that they can point to and say here, you guys have all been warned and this is also under our remit.”

The agency, however, portrayed the case as open-and-shut: “Absent a valid exemption, offerings of securities, in whatever form, must be registered,” Antonia Apps, director of the SEC’s New York Regional Office, said in a press release. “Without registration, investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.”

Still, the action raises a slew of questions: If certain NFTs are deemed securities, for example, would the marketplaces they’re traded on be subject to securities exchange regulations?

“NFT marketplaces are susceptible,” says Walker. “But it’s very facts and circumstances-based because of the different kinds of marketplaces.”

The SEC insisted the NFTs were investment contracts, which if traded become securities. To determine whether a financial instrument is an investment contract, U.S. courts use the Howey Test, a framework determined by a 1946 Supreme Court ruling in a case about citrus groves. The test requires that investment contracts involve an investment of money in a common enterprise, with the expectation of profit to be derived from the efforts of others.

Notably, says Seira, the Howey test for securities is done at the transaction level, and the underlying assets are not part of the calculation.

“NFTs are a technological standard,” he says, meaning that a number of different kinds of assets, including art, collectibles, tickets and even real estate (which can all be digital or physical) can represented by tokens. Indeed, it’s not the token but the recorded transactions onto a blockchain that makes up the NFT.

Issuers should be careful about how they market and advertise their NFT projects, says Max Dilendorf, digital assets lawyer in New York. “The line is very thin, so projects need to be really cautious about how they present to the public,” he adds.

As with the slew of digital asset securities charges and allegations brought forth by the SEC, Dilendorf and Seira said that clear guidelines and regulations would best protect both consumers and investors. Indeed, the two Republican appointees to the SEC, Hester Pierce and Mark Uyeda, asked whether the current securities framework is the best for NFT purchasers in a statement that followed the enforcement action.

“How should recent legislative efforts to construct a framework for crypto inform our thinking about the application of securities laws to NFTs” should be a key question regulators are asking themselves, they wrote.

Regulatory clarity is, at best, brief when it comes to NFTs. Existing guidance has been limited to tax reporting procedures by the Internal Revenue Service. In its latest proposed guidelines for the 2025 tax year, the IRS suggested that NFT marketplaces, like other digital asset exchanges, should be deemed brokers and would have to report accordingly.

Current draft bills making their ways through Congress do not thoroughly address NFTs as an individual asset class. One being considered by the House Finance and Agricultural committees merely calls for a study on their scope and size.

“It’s kind of a niche within a niche,” says Seira, so it’s unlikely NFTs would be at the core of proposed legislation.