Morning Minute | NFTs Are Securities

TylerD's Market Summary

At least some of them are, according to the latest actions from the SEC. And the entire space should be on the highest notice.

🚨 "Impact Theory" Team Charged with Selling Unregistered Securities

Many have been clamoring for regulatory clarity in the crypto space for months and years now.

Well the NFT space just got some clarity via enforcement action, on what you can't do to avoid being labeled a security.

Tom Bilyeu and team are paying the price - but are they just the tip of the iceberg?

What Happened?

Tom Bilyeu's NFT project "Impact Theory" has been charged by the SEC with offering unregistered securities.

Here's how things went down:

• Impact Theory raised $30M selling NFTs from Oct-Dec 2021, and additional ~$1M in royalties on the secondary market
• They sold 3 tiers of Founder's Keys called “Legendary,” “Heroic,” and “Relentless,” each of which come with their own utility maps, prices from 0.05 ETH all the way to 3 ETH per NFT
• The team said things like it was "trying to build the next Disney" and that it would deliver "tremendous value" to holders, while also saying they would use funds for "development," "bringing on more team," and "creating more projects"

By making statements like that, the SEC claims the project encouraged investors to view the purchase of the NFTs as investments in the business.

And thus are securities, pursuant to the Howey Test.

So what does that mean for Impact Theory?

Impacts of Being Deemed A Security

Tom Bilyeu and the Impact Theory team settled with the SEC without admitting guilt or wrongdoing.

Impact Theory has agreed to a cease-and-desist order finding they violated the Securities Act of 1933.

As part of their settlement, Impact Theory:

• Will pay $6.1M in penalties
• Must establish a "Fair Fund" to return money to investors
• Destroy all the Founder's Keys NFTs and eliminate royalties
• Publish notices on its websites and social media regarding the order

The team already did a first round of NFT buybacks back in XX and burned those, but they will need to complete another round.

They have 10 days to comply (as of now it does not look like their website has not been updated).

What They Said

The Impact Theory team did a few key things wrong here, mostly around what they said.

• In advance of the sale, they encouraged NFT buyers to view the act of minting/buying as an investment in the business and alluding that they would profit from the investment if Impact Theory was successful, saying things like:
  • “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.”
• They made statements that value would be created via the team's efforts and were using the sale proceeds to help create that value, like "bringing on more team" and then went even further to state things like:
  • “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.”
• They publicly linked the success of the project with the success of NFT holders, saying things like:
  • "Our goal is to make sure that as Impact Theory is enriched, as [its
    founders] are enriched, as our team here at Impact Theory is enriched, that you guys also are enriched."

This led those in the Discord and community to get pretty hyped, and say some pretty damning things as well.

Actual quotes from prospective and actual NFT buyers:

• “This is like being offered to invest in a booming company when they’re Series A.”
• “Its like investing 10k with a 300k upside, for a small risk.”
• “Everyone here is an early adopter! Buying a founders key is Like investing in Disney, Call of Duty, and YouTube all at once.”

Why It Matters

The questions on all of our minds - which project is next, or already under review?

How many founding teams made similar statements?

The answer - a lot.

Especially regarding the team creating value from sale proceeds. That's basically any and every roadmap.

So is this a doomsday scenario?

Well, it's not great. It seems likely that more (perhaps many more) enforcement actions are coming.

But...Impact Theory is allowed to continue operating (albeit with a much lighter treasury). So this doesn't mean these projects are going to be shut down; they are just going to be run differently.

It does seem like this could be the death of the utility NFT sector, though. Or at least the "great rebranding."

Everything will revert back to being digital collectibles and collectibles alone. The Impact Theory team has already said as much.

Founders of utility projects should be in their war rooms right now figuring out a go-forward strategy. Anyone planning to launch soon should be doing the same.

Tom did do a Spaces yesterday, where he gave advice to new or prospective founders:

• Build everything in advance, then sell NFTs
• Price the NFTs at free or cheap
• Never say anything about the NFTs being an investment

Simple advice, yet something many have missed.

Now we wait for the impacts and the next dominoes to fall...

🚚 What else is happening in NFTs?

Here is the list of other notable headlines from the day in NFTs:

• Trading volume came in around 4,800 ETH on Monday, near local lows; NFTs saw a mix of red and green with QQL, Sam Spratt "Players" and Captainz leading top movers
• Nouns daily auctions hit their highest level in months at 33.87 ETH, as a proposal that would fork the Nouns DAO and effectively allow holders to return their Noun for 35+ ETH is close to formal approval
• OpenSea announced it is creating standards for redeemable NFTs, publishing ERC-7496, ERC-7498, SIP-14, and SIP-15 for redeemables
• Animoca Brands shared its 2022 earnings on Monday, which included 37% year-over-year revenue growth (from $291M to $402M) and a new web3 services business line which drove $120M
• Deekay Motion's "New Era" NFT will be available as a physical, after Cozomo and DeeKay partnered with Infinite Objects to release both ETH & BTC version of the art for $169.420
• Cryptoys will debut Disney's Mickey Mouse, Minnie Mouse, and Pluto collectibles this September
• adidas shared that its Vending Machine users will get a chance to upgrade their traits for free

🌎 Around Crypto and Web3

A few other Crypto and Web3 headlines that caught my eye:

• The crypto market was up slightly on the day; BTC +0.3% at $26,000; ETH +0.4% at $1,644
• The new "community" PEPE token hit a $45M marketcap on Monday before retracing 50% to $22M overnight; the main PEPE fell another 6% to $324M mc
• FriendTech made the controversial announcement (now deleted) that anyone who uses a fork of their product would lose all of their airdrop points
• Tokenized U.S. Treasuries have hit a new blockchain, as Tradeteq launched a new offering on the layer 1 blockchain XDC Network today (joining Steller and Ethereum)

🚀 NFT Total Volume

• BAYC (579 ETH, 26.5 ETH Floor)
• DeGods (452 ETH, 4.32 ETH)
• MAYC (378 ETH, 5.08 ETH)
• Milady (318 ETH, 3.89 ETH)
• Azuki (227 ETH, 4.44 ETH)

📈 NFT Floor Price Increase

• QQL Mint Pass (43%, 7.89 ETH Floor)
• Mutant Hound Collars (40%, 0.39 ETH)
• Sam Spratt "Players" (38%, 6.9 ETH)
• Synthetic Dreams (37%, 1.7 ETH)
• CryptoDickbutts S3 (36%, 0.99 ETH)

🗓 Upcoming NFT Mints and Reveals

Today is a lighter day of drops and events.

doods is dropping a new PFP in the pixel art sector, though similar in art styles to pixel PFPs that we've seen before.

The highlight is likely out of Zeneca as ZenAcademy launches their PFPs the Denizens today. With ZenChests at 0.11 ETH and down 80%+ from ATH, this doesn't seem to be set up for a good trade. But if you want to join Zeneca's community and rock the PFP, then by all means.

If you want more, see the full list of today's drops from Swizzy's daily mint monitor. 

• Seedifyfund - Seedworld (10:00 a.m. ET)
• ZenAcademy PFPs (11:00 a.m. ET)
• Veefriends - Eruption 9 (11:00 a.m. ET)
• doods (3:00 p.m. ET)
• Base - OpenSea mint (TBD)

Enjoy this write-up and/or want to sponsor the Morning Minute? Follow along with me on Twitter @tyler_did_it or reach out via email tyler.warner@luckytrader.com.

For all volume and floor price data, see Lucky Trader's Project Rankings page.

For all upcoming mints, see Lucky Trader's NFT Calendar page.