- The U.S. Securities and Exchange Commission (SEC) settles with Impact Theory over their $30 million Founder’s Key NFTs, classifying them as securities.
- SEC Commissioners Hester Peirce and Mark Uyeda dissent, questioning the application of the Howey Test and highlighting the unique characteristics of NFTs.
The Legal Conundrum Around NFTs and Securities
In an unprecedented move, the SEC announced a settlement with media company Impact Theory, which had raised nearly $30 million from the sale of Founder’s Key NFTs last year. Utilizing the Howey Test—a canonical methodology for determining if a transaction involves a security—the SEC classified the NFTs as such. However, dissenting Commissioners Hester Peirce and Mark Uyeda suggest this case raises more nuanced issues, particularly the categorization of NFTs within the ambit of securities law.
According to the dissenting commissioners, while they recognize that phrases like “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once” can cause apprehension, these don’t necessarily constitute promises that would qualify under an “investment contract.” The key factors such as ownership of shares or dividends are conspicuously absent. They highlight that the broad remit of the SEC shouldn’t extend to complex digital assets with unique properties, like NFTs.
The Murky Waters of NFTs as Investment Vehicles
Another facet complicating this settlement is Impact Theory’s earlier initiatives to repurchase the NFTs. They have conducted two buybacks, repurchasing just over 20% of the tokens for $7.7 million. Despite this, the dissenting commissioners argue that a settlement of this sort usually necessitates such a buyback, questioning the SEC’s role in this matter.
The commissioners further argue that NFTs are too heterogeneous to set a legal precedent. Many have varying degrees of “utility,” offering holders distinct rights or advantages, which muddles their classification as securities. They suggest that the SEC should instead focus on crafting clearer guidance for NFT issuers to comprehend when they could be wading into the territory of securities.
In response, Impact Theory’s CEO, Tom Bilyeu, detailed the company’s motivation for offering multiple refunds. He stated that the Founder’s Key NFT was not intended to be a financial instrument but a “collectible with utility.” Furthering this narrative, the company has yet to utilize any of the raised capital. Bilyeu emphasizes that their priority was to protect the community from financial loss in this high-risk venture, characterizing interaction with the SEC as a “very expensive dance.”
Thus, the settlement opens the door for further dialogue and scrutiny on how NFTs intersect with securities law, particularly as decentralized autonomous organizations (DAOs) explore investment-like structures. The dissenting opinions, however, indicate that a one-size-fits-all approach may be inadvisable, warranting a more nuanced regulatory framework.