Navigating the NFT Regulatory Landscape: Insights from the SEC's Impact Theory Case
Last week we saw the US Securities and Exchange Commission (SEC) make its first direct move in the NFT world.
Impact Theory’s Founders Keys are marketed as NFTs that, once purchased, provide access to different levels of content, based on the ‘level’ of NFT (there are three: ‘relentless’, ‘heroic’, and ‘legendary’). The SEC’s opinion, however, is that Impact Theory “invited potential investors to view the purchase of a KeyNFT as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts”. The case has been settled, with Impact Theory agreeing to eliminate all the remaining ‘offending’ NFTs under its control, waive royalties on secondary sale of those already belonging to others, and pay a $6M fine.
It provides yet another crucial insight into the evolving regulatory landscape around tokenized assets, and NFTs in particular. Some commentators have suggested that the lawsuit is evidence that we are moving to a world where all NFTs are considered securities, but things are not all that clear.
Let’s remind ourselves of the Howey Test: the long-established four criteria that an asset must meet to qualify as an “investment contract”:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
NFTs are ultimately data structures, controlled by smart contracts. While it is perfectly possible to create and sell an NFTs that fulfills all four of the criteria above (for example, “buy this NFT now and we’ll give you a % of our company’s profits in the future”), it is also perfectly possible to use the technology for purposes other than investment - in-game items, loyalty cards, tickets, digital art, collectibles… the list of applications is long.
Note here that speculation on the value of an asset does not automatically qualify it as an investment - and this is just as true in the ‘real world’ as it is in the digital world. Buying a rare item (like a piece of art or stamp), is not considered an investment contract, even if the buyer is hoping that the asset will increase in value in the future, as it fails two points of the Howey test.
Here at Freeverse we’re not big fans of using NFTs for speculation or investment - our Living Assets™ are designed with User Generated Value in mind, so that their market value is dependent on how they are used, not just on how rare they are.
So while much of the coverage of this week’s news has been alarmist (“the SEC is coming for NFTs!”), the extra scrutiny for NFT projects is a good thing. It provides more clarity for the use of the technology in a sustainable and genuinely useful way, adds more protection for the consumer, and also protects business and brand reputation.
So while much of the coverage of this week’s news has been alarmist (“the SEC is coming for NFTs!”), the extra scrutiny for NFT projects is a good thing. It helps to clarify that there are many ways to use the technology and encourages businesses and brands to use the technology in more sustainable and genuinely useful ways in the long run.
Here at Freeverse, we’re not big fans of using NFTs for speculation or investment. Our dynamic NFTs (Living Assets™) are designed with User Generated Value in mind, so that their value is dependent on how they are used, not just on how rare they are. This moves NFTs away from being something to gamble with or passively collect to an active engagement, where each owner's interactions affect their NFTs' properties and therefore value – rather than basing value on speculation or scarcity.