Today the Commission brought its first non-fungible token (NFT)[1] enforcement action. 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 facts underlying the settlement are mostly unremarkable: Impact Theory sold almost $30 million of NFTs along with making loud promises that the NFTs would increase in value. Purchasers of the NFTs shared the excitement; the order quotes one purchaser as saying: “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once.” Order ¶ 9 C. However, the NFTs were not shares of a company and did not generate any type of dividend for the purchasers. The Commission charged Impact Theory with engaging in an unregistered securities offering on the theory that the NFTs were offered and sold as investment contracts. The settlement does not include fraud charges.

We understand why the Commission was concerned about this NFT sale. 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.

Even if the NFT sales here fit squarely within Howey, is this set of facts one that warrants an enforcement action? The typical cure for a registration violation is a rescission offer, which the company already made in the form of repurchase programs. The company offered to repurchase the NFTs from primary and secondary-market purchasers in December 2021 and August 2022. Order at ¶ 16. It paid out a total of $7.7 million worth of Ether. Presumably other purchasers likewise could have sold their NFTs back to the company.[2]

Because it is the first NFT settlement, this enforcement action raises many difficult questions. The Commission should have grappled with these questions long ago and offered guidance when NFTs first started proliferating. Nevertheless, having a discussion about NFTs now could help the Commission to approach the topic sensibly. Some questions we have include:

1. Non-fungible tokens are not an easy-to-characterize asset class, particularly because they can give the owner a wide array of rights to digital or physical assets. People are experimenting with a lot of different uses of NFTs. Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty. Are there useful ways for the Commission to categorize NFTs for purposes of thinking about whether and how the securities laws apply to offers and sales?
2. If the Commission were to craft guidance for NFT creators seeking to understand potential intersections with the securities laws, what questions would be helpful for us to address?
3. How should recent legislative efforts to construct a framework for crypto inform our thinking about the application of securities laws to NFTs?
4. Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?
5. If a securities law regime is best, how could SEC registration requirements be tailored to reflect the unique nature of NFTs? Would compliance with any requirements be prohibitively costly? If so, what alternative approaches would be more workable, but still achieve the Commission’s objectives of protecting investors and the integrity of the marketplace?
6. Does this action indicate that the Commission generally views previous NFT offerings as securities offerings? If so, will the Commission provide specific guidance to those issuers describing what they need to do to come into compliance?
7. What, if any, restrictions should apply to secondary market sales of NFTs that the issuer sold as the object of an investment contract?
8. This settlement includes an undertaking by the issuer to destroy NFTs in its possession. What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?
9. The settlement includes an undertaking to “[r]evise the smart contract(s) or any other programming code(s) or computer protocol(s) underlying the KeyNFTs to eliminate any royalty.” Given that one of the promising features of NFTs is the ability to reward creators with royalties every time an NFT they created is sold, what precedent does this set for future cases?