Legal Expert Voices Concerns Over SEC’s Broad Implication of NFTs as Securities

The recent enforcement action taken by the United States Securities and Exchange Commission (SEC) against an NFT project has ignited a debate within the cryptocurrency community. The SEC’s move has prompted discussions about the potential implications for numerous NFT initiatives that could be viewed as fitting the SEC’s description, potentially making them susceptible to future regulatory actions.

On August 28, the SEC filed charges against the entertainment company Impact Theory, alleging that it had conducted the sale of unregistered securities through NFTs called “Founder’s Keys.” These NFTs were marketed as an investment in the company’s business and reportedly raised around $30 million in sales.

The SEC’s argument centers around the notion that these NFTs constituted investment contracts and thus qualified as securities. The agency contended that the company violated the Securities Act of 1933 by conducting these NFT sales without proper registration.

However, not everyone within the cryptocurrency community agrees with the SEC’s decision. SEC commissioners Hester Peirce and Mark Uyeda issued a dissenting statement on the same day, arguing that the company and purchaser statements cited in the SEC’s order did not form the type of promises that typically constitute an investment contract.

The commissioners further pointed out that the SEC does not typically take enforcement actions against sellers of items like watches, paintings, or collectibles that make vague promises to enhance brand value and increase resale worth.

The implications of this enforcement action have triggered discussions within the community, with some pointing out that many NFT projects could fall under the SEC’s description. A researcher from the well-known NFT collection Azuki suggested that this case might be significant, as its details could apply to a substantial number of NFT projects.

Community members also highlighted that many NFT project founders share similar messaging to Impact Theory, encouraging potential buyers and promising profits as the project gains traction.

To gain further insights into the SEC’s recent action against NFTs, Cointelegraph (site) spoke with Oscar Franklin Tan, the chief legal officer of NFT platform Enjin. Tan emphasized the challenges in classifying all NFTs as securities, noting that NFTs encompass a broad spectrum of possibilities, ranging from digital art to health records and land titles.

Tan expressed concern that the lack of clarity in regulatory rules could stifle creators from exploring various economic and social models within the realm of Web3. He stressed that the SEC’s approach might hinder the space from fully realizing the benefits of Web3.

The legal expert called for greater regulatory clarity from the SEC, asserting that creators should not have to grapple with uncertainty about whether their creations could be deemed investment products.

This situation isn’t the first instance where NFTs have hovered on the verge of being labeled as securities. In a ruling on February 22, a U.S. judge suggested that NBA Top Shot NFTs could potentially be classified as securities due to the established legal relationship between investors and promoters, resembling the characteristics of an investment contract.

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