In a recent development, two prominent commissioners at the US Securities and Exchange Commission (SEC), Mark Uyeda and Hester Peirce, have expressed their dissent against the agency’s enforcement action on Non-Fungible Tokens (NFT). 

As reported by Bitcoinist on Monday, the SEC had initiated legal proceedings against media and entertainment company Impact Theory, which resulted in a cease-and-desist order and a substantial financial penalty of over $6.1 million.

Commissioners Uyeda and Peirce, known for their support of innovation within the crypto industry, voiced their disagreement with the SEC’s classification of certain NFT sales as securities. 

They emphasized their concerns about applying the Howey analysis, a legal framework used to determine whether an investment contract exists. They called for a deeper examination of the issues surrounding NFTs before pursuing additional enforcement actions.

SEC Commissioners Clash Over NFT Crackdown

The settlement involving Impact Theory centered around allegations of the company engaging in an unregistered securities offering through the sale of NFTs. While the settlement did not include fraud charges, Impact Theory agreed to pay disgorgement, prejudgment interest, and civil penalties. 

The case highlighted the company’s sale of nearly $30 million worth of NFTs, accompanied by ambitious promises of their future value appreciation. However, the NFTs did not represent company shares or provide dividends to purchasers.

The dissenting commissioners acknowledged the SEC’s concerns regarding the hype surrounding NFT sales and the potential risks investors face. However, they argued that the statements made by the company and purchasers did not meet the criteria for an investment contract. 

They drew comparisons to the sale of tangible items like watches, paintings, or collectibles, where vague promises related to brand building and resale value appreciation do not typically lead to enforcement actions.

Moreover, the settlement between Impact Theory and the SEC included a repurchase program through which the company offered to buy back the NFTs from primary and secondary-market purchasers. 

The commissioners questioned whether this remedy and the absence of fraud charges justified the enforcement action. They further highlighted the need for the SEC to provide more explicit guidance on NFTs and engage in a broader discussion on the intersection of securities laws with this emerging asset class.

 Should NFTs Fall Under Securities Laws?

In their statement released just hours after the SEC’s lawsuit against Impact Theory, the dissenting commissioners raised several thought-provoking questions for the SEC to consider. 

They emphasized the unique characteristics of NFTs and the challenges in categorizing them for regulatory purposes.

They also questioned the applicability of securities laws to ensure adequate investor protection and marketplace integrity and suggested exploring alternative regulatory frameworks. They also called for guidance for NFT creators and issuers to navigate compliance requirements.

The disagreement between SEC Commissioners Uyeda and Peirce highlights the complex and evolving nature of the Non-Fungible Tokens and the overall crypto market for the US regulatory bodies. 

As the SEC’s first enforcement action in this space, this case underscores the need for regulatory clarity and proactive guidance to address the issues surrounding NFTs. 

Featured image from iStock, chart from TradingView.com