Commissioners Peirce and Uyeda criticised the SEC’s approach to the Impact Theory case, stating they should have provided guidance “long ago” when NFTs first started proliferating.
On August 28, the US Securities and Exchange Commission (SEC) charged media company Impact Theory with selling unregistered “crypto asset securities” in the form of NFTs. The ruling outlined that Impact Theory raised $30 million from hundreds of investors through its NFTs, telling them they would profit from their purchase if the project was successful.
The SEC stated that the NFTs offered and sold to investors by Impact Theory were investment contracts and therefore securities, but not every Commissioner agreed.
Commissioners Hester M. Peirce and Mark T. Uyeda dissented with the Commission’s stance, stating they disagreed with its application of the Howey analysis.
The Howey test is used to determine whether or not an asset is a security. It looks at four core aspects: the investment of money, whether there’s a common enterprise, the expectation of profits, and the efforts of others. If an asset meets the Howey test, it must register with the SEC as a security, and will be subject to securities law.
The dissenting statement outlines that the facts of the case are “mostly unremarkable”, and while they share the SEC’s concern about the “hype” that leads people to invest in NFTs they don’t understand well, the facts are simply “not a sufficient basis” to pull the matter into the SEC’s jurisdiction.
“The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract,” the dissent stated.
It added, “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.”
Impact Theory has already paid out $7.7 million in Ether
The dissent outlined that even if the NFT sales did clearly fit within the Howey test, the facts are still unlikely to warrant an enforcement action. Failing to register a security typically results in a rescission offer, rather than an enforcement action, which Impact Theory already made in the form of repurchase programs.
“The company offered to repurchase the NFTs from primary and secondary-market purchasers in December 2021 and August 2022. It paid out a total of $7.7 million worth of Ether. Presumably other purchasers likewise could have sold their NFTs back to the company,” the dissent clarified.
The Commissioners were also critical of the SEC’s wider approach to NFTs, stating the Commission should have offered guidance when NFTs first started proliferating “long ago”.
Questions the dissent proposed to the SEC include:
- How to categorize NFTs given their diverse rights and uses, especially using recent enforcement actions as precedent?
- What key questions should guidance for NFT creators cover in relation to securities laws?
- How should recent crypto-related legislation influence applying securities laws to NFTs?
- Is the securities law approach suitable for ensuring NFT buyers get necessary information, and could alternative regulations work better?
- If securities laws are used, how can SEC registration adapt for unique NFTs while balancing costs and investor protection?
- Does recent enforcement suggest past NFT offerings are seen as securities, and will guidance be provided for compliance?
- What restrictions should apply to secondary market sales of NFTs initially sold as investment contracts?
- The settlement destroys issuer-held NFTs; what precedent does this set for unique digital art or music NFTs?
- The settlement removes creator royalties from NFTs; what precedent does this create for future cases involving royalties?
Commissioner Peirce has become widely known in the crypto space as ‘crypto mom’ for her tolerant approach to crypto.
She has been vocal in her dissents of the SEC’s approach to viewing cryptocurrencies as securities, calling the idea “unworkable” and “stifling”.
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