Utility NFTs aspiring to be “decentralized Disney” were unregistered securities, says SEC; Tom Bilyeu-led company settles, agrees to pay $6.1M, destroy its NFTs, and disable all creator royalties. Which project or token is next?

  • The SEC shoe has fallen: the agency has secured its first settlement of an enforcement against an NFT project called Founder’s Keys launched by the Tom Bilyeu-led Impact Theory.
  • In the action, the SEC alleged that the Founder’s Keys NFTs were unregistered securities.
  • Two SEC commissioners Hester Pierce and Mark Uyeda dissented, disagreeing that the NFTs were securities: “The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do 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.”
  • Without admitting the allegations, Impact Theory agreed to a settlement, which requires the company to:
    • Pay disgorgement and a fine of more than $6.1 million;
    • Destroy all Founder’s Keys NFTs in its possession;
    • Disable all creator royalties from resales of the Founder’s Keys NFTs.

Why utility NFT projects should be worried

  • The SEC’s view of the Founder’s Keys NFTs as unregistered securities sends an ominous signal to many utility NFT projects. In its allegations, the SEC highlighted the NFT project’s touting of its business and what the NFT would provide buyers:
    • “6. Through those events and public statements, Impact Theory invited potential investors to view the purchase of a KeyNFT as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact Theory emphasized that the company was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to KeyNFT purchasers, and that the future value of the KeyNFTs would be significantly greater than their purchase price. For example, Impact Theory stated:
    • A. “If you’re paying 1.5 [ETH], you’re going to get some massive amount more than that. So no one is going to walk away saying, ‘Oh man, I don’t think I got value here.’ I’m freakishly bullish on that. I will do whatever it takes to make sure that that is true.”
    • B. “The project itself is called the Impact Theory Founder’s Key and we like to say that it unlocks the future of everything that we’re doing as a company. . . . As I really looked at the [NFT] technology, I realized what it allows you to do is reward your community. And for somebody like me who’s trying to build the next Disney, what you need is a thriving community. And so we saw this as a tremendous way for our community to capture tremendous value from the things that we’re building.”
    • C. “Now as we’re building out this IP, imagine that you could’ve gotten in on Disney when they were doing Steamboat Willie, and that’s how we think of the Legendary tier. That’s how we think of this whole first drop quite frankly.”
    • 7. Impact Theory also underscored that this purported value would be derived from the company’s efforts, and that Impact Theory would use the proceeds from the Offering for “development,” “bringing on more team,” and “creating more projects.” For example, Impact Theory stated: A. “But yeah, I will make sure that we do something that by any reasonable standard, people got a crushing, hilarious amount of value.” B. “The key takeaway that I want you to have is that there is a lot of cool things coming in the next 18 to 24 months. And that is ultimately a tiny fraction of the things that will be coming in the next five years. The reason that we’re only selling on the next 18-to-24 month hype is I want you guys to be able to capture 90 percent of the economic value of all the big things that we will do in the coming years beyond that. And the only way to do that is to only sell and set the price based on the things that we’re doing in the short term, and that will leave the upside to be largely captured by you guys.”
  • These sort of statements were probably common among at least some other NFT projects. So don’t expect this to be the last action the SEC brings against utility NFT projects or NFT platforms offering their own tokens. It’s just the first.
  • If you’re interested in learning more about the securities issue, I devote part of Chapter 10 in my book Creators Take Control to analyzing the legal issue. My analysis turned out to be right.

Will NFT projects be required to buy back their NFTs?

  • UPDATE: One of the scariest possibilities is that NFT projects deemed to involve unregistered securities could be required to make a rescission offer to investors, effectively buying back their NFTs from the investors. For more, read our analysis here.