SEC’s Enforcement Action on NFTs Raises Questions about Future Regulation
The United States Securities and Exchange Commission (SEC) has fined Impact Theory, a Los Angeles-based media company, $6 million for selling illegally unregistered securities in the form of NFTs. While the case is clear-cut, it leaves the fate of the broader NFT industry uncertain, as the SEC’s actions against NFTs are unprecedented. Two SEC commissioners, Hester Peirce and Mark Uyeda, criticized the chairman’s attempt to regulate the NFT market, arguing that the SEC has never regulated the art market or the trade of luxury goods. However, litigator Jeremy S. Goldman believes that if the SEC starts targeting mainstream NFT projects, it would be a significant step that raises complex legal and philosophical questions.
Regulating NFT Art Projects and Digital Collectibles
There is a debate about whether the SEC will extend its regulation to NFT-backed art projects, digital collectibles, and membership passes. While some believe that the SEC lacks the appetite to engage with the art market and regulate the NFT art market, others argue that certain NFT projects resemble companies conducting IPOs and acting as brokers. However, regulating major profile picture (PFP) projects without encroaching on the art world will be a delicate balance for the SEC, particularly considering that some NFTs have been featured in prestigious art museums and auction houses.
The Significance of Creator Royalties in SEC’s Decision Making
The SEC’s cease-and-desist order against Impact Theory highlighted the company’s collection of a 10% creator royalty on every resale of its NFTs. This suggests that the SEC sees a connection between creator royalties and securitized assets. If this association guides the SEC’s decision-making, it could mean that the majority of the mainstream NFT market falls under its regulatory purview. Creator royalties have become increasingly threatened in recent months, with some NFT marketplaces ceasing to guarantee them. However, industry leaders argue that creator royalties are integral to NFTs and the industry’s purpose.
Implications for the Future of NFT Regulation
The SEC’s enforcement action against Impact Theory raises questions about the agency’s future plans for the NFT market. While the SEC has a history of aggressively regulating the crypto industry, the extent to which it will regulate NFTs remains uncertain. The outcome of the ongoing battle over creator royalties may also influence the SEC’s stance on industry-wide regulation. Companies like Yuga Labs have indicated their commitment to platforms that ensure creator fees, but this victory may come at the cost of heightened regulatory risk for the industry.
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