The first sanction decision by the United States Securities and Exchange Commission (SEC) regarding an NFT project has sparked the reaction of community members, highlighting how the decision could be “problematic” for many NFT projects that fit this definition and could be on the SEC’s target list. The evaluation of NFT projects as securities creates uncertainty about the future of the NFT market and regulations, and there is a demand for more regulatory clarity from the SEC. This event is seen as a significant turning point in the regulatory process of NFTs.
Allegations of Violating the Law in NFT Sales
On August 28th, the SEC accused entertainment company Impact Theory of conducting unregistered securities sales. According to the SEC, NFTs called “Founder’s Keys” were sold as investment opportunities, and the company is alleged to have raised approximately $30 million through these sales. The SEC believes that the sold NFTs are investment contracts and are considered securities. The filing stated that the company violated the Securities Act by selling NFTs without registering them.
Not everyone agrees with the SEC’s decision. On August 28th, SEC commissioners Hester Peirce and Mark Uyeda also wrote dissenting statements against the SEC’s action. The duo argued that the promises made by a handful of companies and buyers mentioned in the decision did not constitute investment contracts.
In addition, the commissioners emphasized that the SEC does not routinely impose sanctions on “watch, artwork, or collectible” sellers who offer uncertain promises to create a brand and increase the resale value of the products. Apart from that, the reactions of community members triggered by the fact that many NFT projects conform to the definition put forward by the SEC were also noted. According to a researcher from the popular NFT collection Azuki, some details may be relevant to “many” NFT projects, making this lawsuit significant.
Other community members shared that many NFT project founders, similar to Impact Theory, have published messages that encourage potential buyers and promise profits as the project succeeds.
NFT Could Mean Infinite Assets
Oscar Franklin Tan, the Chief Legal Officer of NFT platform Enjin, explained SEC’s recent action against NFTs as follows:
“We must ensure that the SEC’s decision does not prevent creators from experimenting with a range of Web3 economic and social models. Implying that all NFTs are securities is problematic because NFTs are a technology and can represent an infinite number of things, from a graphic to a medical record or a land title.”
The lawyer also shared that there is confusion everywhere. Tan said he was recently asked whether it was illegal to provide an NFT participation certificate protocol at a fashion show. Tan believes that the lack of clear rules will discourage creators from experimenting with Web3 models and prevent the field from ever exploring “all the benefits of Web3.” The Chief Legal Officer also said that there are many possible models and that creators should not have to wonder if they are creating an investment product, demanding better regulatory clarity from the SEC.
This case is not the first instance where NFTs have been considered securities. A US judge stated in a ruling on February 22nd that NBA Top Shot NFTs could be classified as securities because they could create a “sufficient legal relationship to form an investment contract” between investors and organizers.
