SEC Commissioners Hester Peirce and Mark T. Uyeda have expressed disagreement over the Commission’s handling of its enforcement action against the Impact Theory. This marks the SEC’s first enforcement action against a non-fungible token (NFT).
The concerns, expressed in a public statement, highlight the complexities surrounding the regulation of NFTs, a rapidly evolving asset class that continues to challenge traditional perceptions of securities law.
In the statement dated August 28, 2023, the Commissioners expressed their disagreement over the application of the Howey Analysis, a test used to determine whether a particular transaction constitutes an investment contract. The controversial point lies in the SEC’s classification of NFTs as investment contracts, accusing Impact Theory of offering unregistered securities. The media company had sold nearly $30 million worth of NFTs, promising value appreciation, a move that raised the Commission’s concerns.
Proponents of regulation
The commissioners were critical of the SEC’s approach and believed that this case, the first of its kind, necessitated deeper consultation before proceeding with enforcement. They noted the importance of considering the nature of non-fungible tokens, which they described as not being an “easily-characterized asset class” given the sheer variety of rights it can grant to digital or physical assets. They argued that this complexity could create challenges if the enforcement action were used as a precedent.
According to the complaint, Impact Theory sold three levels of NFTs between October and December 2021. Investors were enticed with the prospect of being part of an ambitious venture aimed at “building the next Disney.” Now that the SEC has designated these NFTs as securities, Impact Theory has violated federal securities laws by conducting an unregistered offering.
The commissioners’ statement raises questions regarding the appropriateness of a securities law regime for NFTs, the recent legislative efforts to create a crypto framework, and the potential implications of this enforcement action for future NFT offerings. One of the questions it raises is whether the Commission’s action suggests a general view of past NFT offerings as securities offerings, and if so, what steps should be taken to comply.
As part of the settlement with the SEC, Impact Theory agreed to multiple actions, including a cease and desist order, the payment of more than $6.1 million in fines and interest, and the creation of a Fair Fund to return cash to investors . Importantly, they also committed to eliminating future royalties from secondary market transactions involving their NFTs, a point the commissioners feared could set a precedent for makers’ ability to receive royalties from their NFTs.
The report that SEC Commissioners Peirce and Uyeda were backing down from SEC’s NFT enforcement action first appeared on CryptoSlate.