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‘Problematic to imply all NFTs are securities’

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The United States Securities and Exchange Commission’s (SEC) first enforcement action on a nonfungible token (NFT) project triggered responses from community members, pointing out how the decision could be “problematic,” and how many NFT projects fit the description and may be next on the SEC’s hit list. 

On Aug. 28, the SEC charged the entertainment company Impact Theory for allegedly conducting the sales of unregistered securities. According to the SEC, the NFTs called “Founder’s Keys” were sold as an “investment into the business.” The company allegedly raised around $30 million through the sales.

The SEC believes that the NFTs that were sold were investment contracts and qualified as securities. The filing noted that the firm violated the Securities Act of 1933 for selling the NFTs without registration.

Not everyone agrees with the SEC’s decision. On Aug. 28, SEC commissioners Hester Peirce and Mark Uyeda also wrote their dissenting statement against the SEC’s action. The duo argued that the “handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract.”

In addition, the SEC commissioners also highlighted that the SEC does not routinely bring enforcement actions against the sellers of “watches, paintings, or collectibles” that also give out vague promises to “build the brand” and increase the resale value of the items. 

Apart from this, the event triggered responses from community members saying that many NFT projects fit the description put out by the SEC. According to a researcher from the popular NFT collection Azuki, the case may be a big deal as some of the details may apply to “quite a few” NFT projects out there.

Other members of the community posted that many NFT project founders put out messaging that’s very similar to what Impact Theory put out that encourages potential buyers and promising profit as the project succeeds. 

Related: ‘XRP is not a security. Period’ — Crypto lawyers on Ripple’s case amid SEC appeal

Amid the issue, Cointelegraph reached out to Oscar Franklin Tan, the chief legal officer of NFT platform Enjin to dive deeper into the SEC’s recent action against NFTs. According to Tan, it’s very problematic to say that all NFTs are securities. Tan explained:

“We must ensure that the SEC order does not hold back creators from trying the spectrum of Web3 economic and social models. It is problematic to imply that all NFTs are securities because NFTs are a technology and can mean an infinite number of things, from a graphic to a health record to a land title.”

The lawyer also shared that the confusion is everywhere. Tan said he was also recently asked if it was illegal to give away a proof-of-attendance protocol NFT at a fashion show. Tan believes that the lack of clear rules will “discourage creators from trying Web3 models” and that it will lead to the space never discovering the full benefits of Web3.”

The legal officer also called for better regulatory clarity from the SEC saying that there are a lot of possible models and “creators should not have to wonder whether they created an investment product.”

This case is not the first time that NFTs came close to being considered as securities. On Feb. 22, a United States judge said in a ruling that NBA Top Shot NFTs may qualify as securities as they may create a “sufficient legal relationship between investors and promoter to establish an investment contract.”

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