- Last week, the SEC announced a settlement of an enforcement action it brought against Impact Theory for its sale of NFTs called Founder’s Keys, which the company allegedly promoted as ways to be a part of the company’s aspiration to build a media business and become a “decentralized Disney.” For more on the story, click here.
- The settlement was the first involving the SEC’s action against NFTs as unregistered securities.
- Although two commissioners dissented from the SEC’s position that the NFTs were securities, there’s at least a possibility, and a probably a decent chance, that the SEC’s view under the Howey test will prevail in the courts for some so-called utility NFTs, in which buyers were buying into a business.
- As I explained in my book Creators Take Control, I think there is a lurking issue about the Howey test’s use of the word “solely” that could reach the Supreme Court one day. But let’s put aside this issue for now.
- The SEC’s settlement of the action against Impact Theory might not be the last of its actions against NFT companies. Plus, federal securities law recognizes a private right of action for investors who purchased unregistered securities.
Will NFT projects have to buy back their NFTs if they are unregistered securities?
- Let’s assume that Impact Theory’s NFTs aren’t the only ones that might be unregistered securities under the Howey test. What corrective action will the NFT companies face if they face an enforcement action or lawsuit in which it is found the NFTs are unregisered securities?
- Rescission offer: Well, the SEC says on its website that companies violating the registration requirement for securities might have to refund the monies to their investors, plus interest, in what’s called a rescission offer. (Impact Theory did so, for example.) Even the dissenting Commissioners in the Impact Theory action said: “The typical cure for a registration violation is a rescission offer, which the company already made in the form of repurchase programs.” This rescission offer would be a part of a settlement. (To see a sample Rescission Offer, click here.)
- Rescission order: In a lawsuit, the court has equitable power to order injunctive relief, which could include an order requiring a rescission offer. See Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 390-91 (2d Cir. 1973) (discussing equitable relief may include order requiring rescission offer for securities violation). The court has equitable discretion to decide whether such a rescission order is warranted, and sometimes, the court declines to do so. See SEC v. Texas Int’l Co., 498 F. Supp. 1231, 1255 (N.D. Il. 1980).
- Perhaps the uncertainty in securities law (see this representative post from 2022) regarding NFTs should be a factor courts consider.
- Some struggling or defunct NFT projects are not likely to have the funds to cover a rescission offer. And, ironically, the successful NFT projects whose NFTs are worth more than the mint price probably won’t face many original buyers wanting a refund. However, secondary purchasers who lost money probably would.
*DISCLAIMER: This article does not constitute legal advice.