Fractional NFTs and non-fungible token baskets could easily be considered investment contracts under US securities law, warns SEC Commissioner Hester Peirce.
March 26, 2021 | AtoZ Markets – Speaking at the Draper Goren Holm Security Token Summit on March 25, SEC Commissioner Hester Peirce, also known as "Crypto Mom," warned issuers of non-fungible fractional tokens and NFT index baskets that they could be inadvertently distributing investment products.
Although Peirce stated that "the whole concept of an NFT is supposed to be non-expendable" - meaning that "in general, it is less likely to be a value" - she noted that "people are being very creative in the kind of NFT they're putting out there."
Peirce urged NFT issuers to be cautious if they decide to "sell fractional interests" in NFT or baskets of NFT, stating:
"You better be careful not to create something that is an investment product, that is a security."
As NFTs command increasingly exorbitant prices, fractional interests in these assets allow smaller investors to continue to gain exposure to a small portion of a high-priced NFT.
Peirce also criticized the use of the Howey Test to assess whether crypto assets are securities, stating that it "hasn't worked that well" for the industry.
The Howey test is frequently used by courts to determine whether an asset is a security; The evidence stems from a landmark 1946 court case involving real estate contracts issued by the owner of a citrus grove to finance business expansion.
Peirce said that if the test had been used in the 1946 case in the same way that it is applied to cryptocurrencies, the courts would have tried to determine whether fruit trees were securities, rather than investment contracts related to plants.
Peirce noted that she hopes to collaborate with incoming SEC Chairman Gary Gensler in developing his "safe harbor plan," which would reduce regulatory scrutiny of emerging blockchain networks.
The safe harbor plan would allow new token issuers three years to build a robust and decentralized network and demonstrate that securities laws are not applicable. The plan would also require issuers to provide detailed plans on the network's roadmap, the token sale, and the people and investors behind the project.
The safe harbor plan would allow new token issuers three years to build a robust and decentralized network and demonstrate that securities laws are not applicable. The plan would also require issuers to provide detailed plans on the network roadmap, the token sale, and the people and investors behind the project.
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