SEC Commissioners Hester Peirce and  Mark T. Uyeda have vocalized their disagreement over the Commission’s handling of its enforcement action against Impact Theory, marking the first enforcement action of the SEC against a non-fungible token (NFT).

The concerns, articulated in a public statement, highlight the complexities surrounding the regulation of NFTs, a rapidly evolving asset class that continues to challenge traditional notions of securities laws.

In the statement dated August 28, 2023, the Commissioners expressed their dissent with the application of the Howey analysis, a test used to determine whether a certain transaction constitutes an investment contract. The contentious point lies in the SEC’s classification of NFTs as investment contracts, thereby accusing Impact Theory of engaging in an unregistered securities offering. The media firm had sold nearly $30 million of NFTs, promising value appreciation, a move rousing the Commission’s concerns.

Regulatory advocates

Critical of the SEC’s approach, the Commissioners felt that the case, the first of its kind, necessitated deeper deliberation before moving to enforcement. They noted the importance of considering the nature of non-fungible tokens, which they described as not an “easy-to-characterize asset class,” given the vast array of rights it can accord to digital or physical assets. They argued that these complexities could result in challenges should the enforcement action be used as precedent.

According to the complaint, Impact Theory sold three tiers of NFTs between October and December 2021. Investors were enticed with the prospect of becoming part of an ambitious venture aimed at “building the next Disney.” With the SEC ruling these NFTs as securities, Impact Theory found itself in violation of federal securities laws for conducting an unregistered offering.

The Commissioners’ statement raises issues regarding the suitability of a securities law regime for NFTs, the recent legislative efforts towards crafting a crypto framework, and the potential implications of this enforcement action on future NFT offerings. Among the questions it raises is whether the Commission’s action suggests a general view of previous NFT offerings as securities offerings, and if so, what steps need to be taken for compliance.

As part of the settlement with the SEC, Impact Theory has agreed to multiple measures, including a cease-and-desist order, paying upward of $6.1 million in penalties and interest, and establishing a Fair Fund to return money to investors. Importantly, they have also committed to eliminating any future royalty from secondary market transactions involving their NFTs, a point that the Commissioners feared could set a precedent affecting creators’ ability to gain royalties from their NFTs.