SEC Commissioners Pierce and Ueda Oppose SEC Enforcement Action on NFTs

Hester Pierce and Mark T. Ueda, both commissioners of the SEC, expressed their disagreement with the way the Commission handled its actions in relation to Impact Theory, the Commission's first enforcement action against a non-fungible token (NFT).

These concerns, recorded in a public statement, relate to the difficulty of regulating NFTs, a fast-growing asset class with a tendency to challenge conventional wisdom about securities.

On 28 August 2023, in a statement dated 28 Aug. The members of the Commission expressed their disagreement with the application of the Howey analysis, a test to determine whether a certain transaction is an investment contract or not. There is one controversial point: the SEC classifies NFTs as investment contracts, thereby accusing Impact Theory of participating in an unregistered securities offering. The US Securities and Exchange Commission has expressed concern that the media firm sold almost $30 million worth of NFTs with the promise of a rise in value.

Emphasizing the approach of the Securities and Exchange Commission, its members noted that if the case is the first of its kind, more in-depth discussion is needed before moving to enforcement. They talked about the importance of considering the nature of non-fungible tokens, which have been described as a “difficult asset class to characterize”, given the vast range of rights it can confer on digital or physical assets. They argued that these complexities could lead to challenge if enforcement action is used as a precedent.

As per the complaint, Impact Theory sold three tiers of NFTs between October and December 2021. Investors were on fire with the dream of becoming part of the enterprise, the purpose of which is "building the next Disney." Impact Theory violated federal securities laws for conducting an unregistered offering. This happened after the SEC recognized these NFTs as securities.

Issues raised in the commissioners' statement include the suitability of the securities law regime for NFTs, recent legislative efforts to create a cryptographic framework, and the possible implications of these enforcement actions once future proposals are implemented. Among the questions he raises is whether the Commission's action has a general understanding of past NFT offerings as current securities and, if so, what actions need to be taken to comply.

After reaching agreements with the SEC, Impact Theory took a series of actions: a cease and desist order, $6.1 million in fines of more than six million; creation of a Fair Fund to return money to investors after certain conditions of the agreement are met. It should be noted that they have committed to excluding all future royalties from secondary market transactions related to their NFTs. This could set a precedent and affect the ability of creators to receive funds from their trades.