For a time, everyone talked about non-fungible tokens (NFTs) and how they’d be the future of speculative investments. However, like any investment vehicle, it’s essential to make clear what buying an NFT means, or else the seller could get into trouble with the law.
Such was the case with Impact Theory, an NFT company the U.S. Securities and Exchange Commission (SEC) fined $6.1 million last month. The SEC alleged that Impact Theory sold its NFTs, called Founder’s Keys, to investors while claiming that anyone purchasing would “profit.”
The SEC uses a so-called “Howey test” to determine whether something is considered an investment contract. Per the test, an investment contract or security exists if there’s an investment in a common enterprise, with the expectation that all investors would profit thanks to the efforts of others.
Because Impact Theory promised a high return on investment with its Founder’s Keys, the SEC concluded that the NFTs count as securities and thus should’ve been registered with the commission.
Impact Theory has neither admitted nor denied the SEC’s statements but has agreed to a cease-and-desist order. The company will return funds to anyone who purchased its NFTs and destroy any remaining tokens.
Making fraudulent statements about NFTs is a crime
In Minnesota, an NFT company or issuer that tries to make a similar statement without proper registration could get into trouble with the state.
According to state law, anyone who makes a false statement to give a misleading apparent value to securities issued is guilty of making fraudulent statements. A conviction leads to imprisonment for up to three years and as much as $5,000 in fines.
The NFT fad may have died down, but the laws that prevent people from misusing digital tokens to defraud others still exist. Anyone who tries to sell NFTs should remember that any suspicious business will draw the attention of both the state and the federal government, and they might need legal counsel if their case heads to court.