Crypto Mom Dissents On SEC NFT Ruling

Two SEC commissioners view the agency's first NFT action as both misguided and heavy-handed.

Crypto Mom Dissents On SEC NFT Ruling

The SEC has just brought a landmark action for the NFT space, but not all the regulator's commissioners are happy about it. Two of them, Hester "Crypto Mom" Peirce—who is well-known in the space for her crypto-friendly stance—and Mark Uyeda, have published a press release explaining why they do not agree with their agency's approach.

Background: Impact Theory

The SEC's own press release states that on August 28, LA-based Impact Theory were charged with conducting an unregistered offering of crypto asset securities. Specifically, the company sold around $30 million in NFTs in Q4 2021, collecting money from hundreds of investors, including investors across the US.

Impact Theory sold three tiers of NFTs, known as Founder’s Keys: “Legendary,” “Heroic,” and “Relentless.” The SEC's order states that Impact Theory "encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts." The company had claimed it was “trying to build the next Disney,” and that success would deliver “tremendous value” to Founder’s Key purchasers.

Founders Key screenshot
Impact Theory's Founders Keys were ruled to be an investment in the business.

Impact Theory agreed to the SEC's cease-and-desist order finding that it violated registration provisions of the Securities Act of 1933. The company was ordered to pay a total of more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty. The SEC's order also establishes a Fair Fund to return monies that injured investors paid to purchase the NFTs.

Why Did Two Commissioners Dissent?

The action is entirely in keeping with the SEC's track record. However, Peirce and Uyeda felt strongly enough about the outcome that they have published their own view as to why the SEC has made the wrong decision.

"We dissented in part because we disagreed with the application of the Howey analysis. Regardless of what one thinks of the Howey analysis, this matter raises larger questions with which the Commission should grapple before bringing additional NFT cases."

The two commissioners are quite clear that they had concerns about Impact Theory's sale. However, their view is that the organization's marketing did not constitute an investment contract.

"Even though we believe strongly that adults should be able to spend their money as they choose, we share our colleagues’ worry about the type of hype that entices people to spend almost $30 million for NFTs seemingly without having a clear idea about how they will use, enjoy, or profit from them. This legitimate concern, however, is not a sufficient basis to pull the matter into our jurisdiction. The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items."

In short, while Impact Theory's promises to their buyers might have been overblown, it's illogical for the SEC to take action. This should not have been in their wheelhouse.

Moreover, the action was heavy-handed. "The typical cure for a registration violation is a rescission offer, which the company already made in the form of repurchase programs."

Finally, as the first NFT action by the SEC, this case sets a precedent without even exploring the nature of NFTs, which are not easy to characterize as an asset class, and which can give a wide range of different rights to both digital and physical assets.

The action puts other NFT projects on notice, and gives new projects yet more reason to establish their operations outside of the US.

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