Two SEC Commissioners Question Enforcement Action on NFT Issuer Impact Theory

SEC Commissioners Hester Peirce and Mark Uyeda have joined to issue a statement on the enforcement action taken by the Commission against NFT issuer Impact Theory.

Yesterday, the SEC revealed its first enforcement action against an NFT issuer, with the firm settling the allegations without denying or admitting the charges.

The two Commissioners said they share the concern about the type of hype that induced almost $30 million for NFTs without a clear path for usage or profit but added that this is not a sufficient worry to cause the SEC to take legal action against the NFT issuer. Peirce and Uyeda noted that the SEC does not typically take action against people who sell watches and other collectibles.

As this is the first enforcement action of its kind, the Commissioners state this raises “many difficult questions,” adding that these questions should have been answered long ago. Peirce and Uyeda then outlined their concerns:

  1. Non-fungible tokens are not an easy-to-characterize asset class, particularly because they can give the owner a wide array of rights to digital or physical assets. People are experimenting with a lot of different uses of NFTs. Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty. Are there useful ways for the Commission to categorize NFTs for purposes of thinking about whether and how the securities laws apply to offers and sales?
  2. If the Commission were to craft guidance for NFT creators seeking to understand potential intersections with the securities laws, what questions would be helpful for us to address?
  3. How should recent legislative efforts to construct a framework for crypto inform our thinking about the application of securities laws to NFTs?
  4. Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
  5. If a securities law regime is best, how could SEC registration requirements be tailored to reflect the unique nature of NFTs? Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the Commission’s objectives of protecting investors and the integrity of the marketplace?
  6. Does this action indicate that the Commission generally views previous NFT offerings as securities offerings? If so, will the Commission provide specific guidance to those issuers describing what they need to do to come into compliance?
  7. What, if any, restrictions should apply to secondary market sales of NFTs that the issuer sold as the object of an investment contract?
  8. This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
  9. The settlement includes an undertaking to “[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the KeyNFTs to eliminate any royalty.” Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?

Peirce and Uyeda are the two Republican-selected Commissioners’ – both have been more supportive of innovation in financial services. Peirce is well known for her advocacy of new approaches for digital assets – uncharted territory for the securities world. The current leadership of the SEC has treated all digital assets as securities, with the exception of Bitcoin – and thus taken a strict view of regulating these new types of assets. While Peirce and Uyeda ask valid questions about the decision to pursue an NFT issuer, little more can be done than vocally challenge the decision, as they are two votes out of five in the Democrat-dominated Commission.

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