NFTs were supposed to be an end-run around the Howey Test. ICOs were clearly securities offerings, and the SEC shut down most of those. NFTs were specifically designed to evade that test, by claiming they were really "digital artworks". This one, though, was clearly marketed as Make Money Fast. The Securities Act of 1934 has a "duck test" definition of security - if it is marketed, bought, sold, and held as a money-making thing, it's a security. The contract terms don't matter. This is because creative financial scams long predate 1934.
> The Securities Act of 1934 has a "duck test" definition of security - if it is marketed, bought, sold, and held as a money-making thing, it's a security
That doesn't seem right. You're missing a really fundamental part of what makes a security a security. Let's steal the cut phrase from investopedia
> an investment contract, for the purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third part
Investing in a common enterprise is a really key part.
A random beeple NFT wouldn't meet that definition, even if marketed as "this hot new thing that's only going up in value". The SEC isn't stopping people buying daft things.
> The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts
This is where it differed from many other NFTs that aren't securities.
I really appreciate the way the Howey Test matches the regulatory purpose, its operationalist approach to the question. That it's stood up to nearly a century of scammer "innovation" is admirable.
It does have the drawback of requiring some interpretation, some thought. But I think that's necessary. Rather than requiring regulators to keep creating ever-broader definitions of "security", patching every scammer hole, it throws the burden back on those wanting to innovate. They're supposed to stop and say, "Well what are we really up to here?" And I think that's where the burden should be.
My only real grumble is that the SEC gave the cryptowhatever world too much rope. I wish they had been faster off the mark, so there was less nonsense. But even there I can't complain too much. Generally I want regulators to be cautious squashing new things.
> if it is marketed, bought, sold, and held as a money-making thing, it's a security
No, sorry, no such legal language exists and how absurd of a law would that be. Anything which goes up and down in value could be bought or sold as "a money making thing" including collectible video games, books, Pokemon cards, .com domain names, pork bellies, houses, bar codes, imported goods, rare sneakers, wholesale products, golf club memberships, Picasso paintings, etc.
There is a Supreme Court precedent called the Howey test which specifies 4 criteria for which all 4 must be true in order for something to be a security. You cannot have 3 of 4 and be considered to be a security:
1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To be derived from the efforts of others
Notably, speculative flipping of owned assets is not considered to profit derived from a common enterprise. Speculative flipping happens everywhere in all supply chains you participate in on a daily basis. Everyone is attempting to buy low in an attempt to sell high. Everyone loves to compare crypto to the tulip mania in the Netherlands from the 17th century. While that is true in some cases, you certainly can't make the case that tulips should be regulated by the SEC.
Yeah, well the SEC also has rules from the 1930's stating that brokers who sell shares to clients and fail to deliver them should have their license suspended.
Guess how often that rule was applied since the 30's?
Zero. And that's not because fails to deliver don't exist.
So yeah, there's a massive regulatory crisis going on and SEC rules are applied however the future employers of the SEC decisionmakers want.
Care to offer some evidence of that? I haven't heard that and I am in the vertical. I agree that Impact Theory was selling securities, and I think it's pretty clear. But bored apes a security? I don't think many share that opinion. How is it any different than art or pokemon cards? People buy both all the time with the expectation they go up in price.
Its great to see commissioner Mark T Uyeda also dissenting, because for some time it was only Hester Pierce that would take these views on digital assets, and for her views to be elevated to head commissioner it requires a Republican President to make that nomination, as she is Republican.
There are many people that are not Republican that would aim to get her appointed and do whatever it takes. Which means casting a vote for a Republican Presidential candidate no matter who that is, simply because the power is imbued within that person.
Mark T Uyeda's existence as a Democrat makes this a lot simpler, for people that would find the above to be awkward, as Democrat leadership could also nominate him for head commissioner.
Bipartisan dissent is great.
It really isn't enough to just not like digital assets or the industry, to establish jurisdiction over them for enforcement.
Oh no people lost money.... because they couldn't resale a consumer product?
> 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.
exactly, its either go after all of them until Congress rescinds the agency's charter completely with this outstanding application of Howey, or show the exact distinction that crypto asset creators can follow to act solely as a consumer product.
This is how the free market works, however. You can sell yourself a pencil for 1mil and it will be technically valued at 1mil in the public market, but good luck selling that to someone else. Same applies to NFTs, just a bit more marketing (edit: and dumb hype i should add) is involved.
I really enjoy a lot of Tom Bilyeu's content, but I've noticed he seems to lack a filter for great ideas from charlatans. And in some regards fair enough, it can be hard, but he's also building a brand and company around some folks who seem to be exaggerating their claims. For example Raoul Pal.
This seems reasonable. From what I am able to pick up, they thought they had found some clever loophole to ICO by selling NFTs. Despite the C&D some of their founders key benefits are still up: https://founderskey.io/images/fk/legendary-key.png
Basically 1. until the platform is implemented the key is basically an IOU. However, it can be sold and transferred for a profit AIUI so it’s not like a crowdfunded game where you get some similar benefits as those can’t be sold for a profit. 2. all your NFT corresponds to is a literal key representing the benefits Impact Theory will make available to you in the future so per the Howey Test you are purchasing a contract (not a specific piece of art or cosmetic) yielding profits from the sole efforts of a third party (Impact Theory).
Honestly, they probably could have gotten away with it if they had been a little less lazy! I bet if they tried to raise money by selling some kind of character art (that currently exists like a normal NFT, not a custom avatar they’ll give you one day) that they’d eventually also display in their final product they’d have been fine.
The interesting takeaway though is that it seems like you can’t do kickstarter-style crowdfunding through transferable NFT ICOs, at least in this form in which you got nothing but a key.
I hate to dunk on this type of art while it's down but
> Impact Theory agreed to destroy all Founder’s Keys in its possession or control
What does this mean practically -- like they delete the files that would allow them to transfer control of the NFT? What even are these things, are they just text files in a distributed file system that list the owner's name or what?
The concept of NFTs stored on a distributed ledger makes sense to me especially for the shitty games that sell skins.
The idea they have some sort of value and can be considered a security, doesn't really. It is no different than the current in-game marketplaces that sell/resell skins from whatever game has skins this week.
At what point does a thing you buy or sell become a security? Are baseball cards a security? Should my local baseball card shop be closed down as an unregistered securities broker?
I don't own crypto or NFTs, so maybe I'm just not informed enough?
From what I'm reading here, the company misled "investors" by attaching the NFT to ownership in the company, which would be considered a security.
"The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts."
When I purchase a baseball card, I do not have the expectation that there is any additional value attached to the baseball card beyond what the collector's market will pay.
> At what point does a thing you buy or sell become a security? Are baseball cards a security? Should my local baseball card shop be closed down as an unregistered securities broker?
The SEC's legal theory is specific to this case, and does not seem to apply generally to all NFTs. Here's the SEC's explanation:
> According to the SEC’s order, from October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as Founder’s Keys, which Impact Theory called “Legendary,” “Heroic,” and “Relentless.” The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact Theory emphasized that it was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to Founder’s Key purchasers. The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration.
Some people argue with baseball, pokemon or whatever cards. I mean they have at least more or less a real usecase. But how about rare sneakers? The are really just for collecting and trading.
Not being from the US, this is probably a stupid question. But why can't people in the US sell willingly and freely sell things (legitimate or otherwise) to other willing buyers without government interference/participation?
I guess I used to think the US was the "land of the free" I guess I understood that people used this phrase in a literal way. Im wondering, when American's use the phrase "land of the free" perhaps I am misunderstanding, and it's really generally used in an ironic way?
When you buy a restaurant lunch, you are expecting to increase your work income via the efforts of the cooks. And you clearly invested money since you pay for the lunch before you ate it. That’s all 3 prongs if the Howey test.
Why isn’t the SEC enforcing securities laws against lunch fraud? Lunches must publish their financial statements so lunch buyers can make informed decisions! Personally I am angry that restaurants don’t publish the information I need to make an informed decision regarding my investment. What if they go bankrupt after I paid for my lunch and before they deliver it?
Even under your ludicrous example, lunch is not an investment because the increase in income does not come from reselling the lunch. At the absolute most, if you really squint and stretch, you could argue that lunch is a business expense.
If crypto was actually like lunch -- returns were generated in minutes, there were tens of millions of successful examples that don't fail, and the insanely rare ones that fail in that mode risk double or low triple digit dollars -- then maybe the SEC wouldn't care as much.
There should be a version of Nomic[1] specific to the sort of fantasy legal interpretation popular with NFT-enthusiasts, tax protestors, sovereign citizens, and other idiosyncratically motivated amateur legal practitioners.
Is this a post-pandemic thing? Like so many people are just walking out without paying the bill these days that they have to charge the card before you eat? This sounds like something that may be happening in SF, and maybe it will catch on in other places eventually, but right now it's not the norm anywhere I've been.
If the restaurant calls the lunch a "Stonk Special" and talks about how the restaurant is growing fast and that people who have purchased the lunch before "did really well", then maybe.
[+] [-] Animats|2 years ago|reply
[+] [-] IanCal|2 years ago|reply
That doesn't seem right. You're missing a really fundamental part of what makes a security a security. Let's steal the cut phrase from investopedia
> an investment contract, for the purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third part
Investing in a common enterprise is a really key part.
A random beeple NFT wouldn't meet that definition, even if marketed as "this hot new thing that's only going up in value". The SEC isn't stopping people buying daft things.
> The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts
This is where it differed from many other NFTs that aren't securities.
[+] [-] wpietri|2 years ago|reply
It does have the drawback of requiring some interpretation, some thought. But I think that's necessary. Rather than requiring regulators to keep creating ever-broader definitions of "security", patching every scammer hole, it throws the burden back on those wanting to innovate. They're supposed to stop and say, "Well what are we really up to here?" And I think that's where the burden should be.
My only real grumble is that the SEC gave the cryptowhatever world too much rope. I wish they had been faster off the mark, so there was less nonsense. But even there I can't complain too much. Generally I want regulators to be cautious squashing new things.
[+] [-] psychlops|2 years ago|reply
At face value that definition would, of course, include commodities and futures, which it doesn't. There must be more to the definition.
[+] [-] chrisco255|2 years ago|reply
No, sorry, no such legal language exists and how absurd of a law would that be. Anything which goes up and down in value could be bought or sold as "a money making thing" including collectible video games, books, Pokemon cards, .com domain names, pork bellies, houses, bar codes, imported goods, rare sneakers, wholesale products, golf club memberships, Picasso paintings, etc.
There is a Supreme Court precedent called the Howey test which specifies 4 criteria for which all 4 must be true in order for something to be a security. You cannot have 3 of 4 and be considered to be a security:
1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To be derived from the efforts of others
Notably, speculative flipping of owned assets is not considered to profit derived from a common enterprise. Speculative flipping happens everywhere in all supply chains you participate in on a daily basis. Everyone is attempting to buy low in an attempt to sell high. Everyone loves to compare crypto to the tulip mania in the Netherlands from the 17th century. While that is true in some cases, you certainly can't make the case that tulips should be regulated by the SEC.
[+] [-] bboygravity|2 years ago|reply
Guess how often that rule was applied since the 30's?
Zero. And that's not because fails to deliver don't exist.
So yeah, there's a massive regulatory crisis going on and SEC rules are applied however the future employers of the SEC decisionmakers want.
[+] [-] dumbfounder|2 years ago|reply
[+] [-] echelon|2 years ago|reply
How about BAYC?
All the a16z investments in crypto?
Will the hammer fall for these, too?
[+] [-] mike_d|2 years ago|reply
No, NFTs were to capitalize on the new tax reporting and valuation requirements for physical art that closed the money laundering loophole.
[+] [-] stainablesteel|2 years ago|reply
[+] [-] yieldcrv|2 years ago|reply
There are many people that are not Republican that would aim to get her appointed and do whatever it takes. Which means casting a vote for a Republican Presidential candidate no matter who that is, simply because the power is imbued within that person.
Mark T Uyeda's existence as a Democrat makes this a lot simpler, for people that would find the above to be awkward, as Democrat leadership could also nominate him for head commissioner.
Bipartisan dissent is great.
It really isn't enough to just not like digital assets or the industry, to establish jurisdiction over them for enforcement.
Oh no people lost money.... because they couldn't resale a consumer product?
> 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.
exactly, its either go after all of them until Congress rescinds the agency's charter completely with this outstanding application of Howey, or show the exact distinction that crypto asset creators can follow to act solely as a consumer product.
[+] [-] carabiner|2 years ago|reply
[+] [-] TacticalCoder|2 years ago|reply
aka "wash trading" (which predates NFT and crypto):
https://en.wikipedia.org/wiki/Wash_trade
[+] [-] capableweb|2 years ago|reply
[+] [-] peyton|2 years ago|reply
[+] [-] swalsh|2 years ago|reply
[+] [-] throwitaway156|2 years ago|reply
[+] [-] maerF0x0|2 years ago|reply
[+] [-] for_i_in_range|2 years ago|reply
[+] [-] opportune|2 years ago|reply
Basically 1. until the platform is implemented the key is basically an IOU. However, it can be sold and transferred for a profit AIUI so it’s not like a crowdfunded game where you get some similar benefits as those can’t be sold for a profit. 2. all your NFT corresponds to is a literal key representing the benefits Impact Theory will make available to you in the future so per the Howey Test you are purchasing a contract (not a specific piece of art or cosmetic) yielding profits from the sole efforts of a third party (Impact Theory).
Honestly, they probably could have gotten away with it if they had been a little less lazy! I bet if they tried to raise money by selling some kind of character art (that currently exists like a normal NFT, not a custom avatar they’ll give you one day) that they’d eventually also display in their final product they’d have been fine.
The interesting takeaway though is that it seems like you can’t do kickstarter-style crowdfunding through transferable NFT ICOs, at least in this form in which you got nothing but a key.
[+] [-] mherdeg|2 years ago|reply
> Impact Theory agreed to destroy all Founder’s Keys in its possession or control
What does this mean practically -- like they delete the files that would allow them to transfer control of the NFT? What even are these things, are they just text files in a distributed file system that list the owner's name or what?
[+] [-] tedivm|2 years ago|reply
What this article is linked to is a dissent from two of the commissioners.
[+] [-] dang|2 years ago|reply
See also https://news.ycombinator.com/item?id=37300225 and https://news.ycombinator.com/item?id=37300237.
[+] [-] Dowwie|2 years ago|reply
[+] [-] jermaustin1|2 years ago|reply
The idea they have some sort of value and can be considered a security, doesn't really. It is no different than the current in-game marketplaces that sell/resell skins from whatever game has skins this week.
At what point does a thing you buy or sell become a security? Are baseball cards a security? Should my local baseball card shop be closed down as an unregistered securities broker?
I don't own crypto or NFTs, so maybe I'm just not informed enough?
[+] [-] evilantnie|2 years ago|reply
"The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts."
When I purchase a baseball card, I do not have the expectation that there is any additional value attached to the baseball card beyond what the collector's market will pay.
[+] [-] pdabbadabba|2 years ago|reply
The SEC's legal theory is specific to this case, and does not seem to apply generally to all NFTs. Here's the SEC's explanation:
> According to the SEC’s order, from October to December 2021, Impact Theory offered and sold three tiers of NFTs, known as Founder’s Keys, which Impact Theory called “Legendary,” “Heroic,” and “Relentless.” The order finds that Impact Theory encouraged potential investors to view the purchase of a Founder’s Key as an investment into the business, stating that investors would profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact Theory emphasized that it was “trying to build the next Disney,” and, if successful, it would deliver “tremendous value” to Founder’s Key purchasers. The order finds that the NFTs offered and sold to investors were investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities laws by offering and selling these crypto asset securities to the public in an unregistered offering that was not otherwise exempt from registration.
[+] [-] endianswap|2 years ago|reply
https://www.sec.gov/news/press-release/2023-163
[+] [-] dang|2 years ago|reply
[+] [-] slapshot|2 years ago|reply
[+] [-] _trampeltier|2 years ago|reply
[+] [-] CryptoBanker|2 years ago|reply
[+] [-] paxys|2 years ago|reply
[+] [-] xigency|2 years ago|reply
[+] [-] ninepoints|2 years ago|reply
[+] [-] IOT_Apprentice|2 years ago|reply
[+] [-] m00dy|2 years ago|reply
[+] [-] unknown|2 years ago|reply
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[+] [-] justin101|2 years ago|reply
I guess I used to think the US was the "land of the free" I guess I understood that people used this phrase in a literal way. Im wondering, when American's use the phrase "land of the free" perhaps I am misunderstanding, and it's really generally used in an ironic way?
Can someone please explain?
[+] [-] paxys|2 years ago|reply
No, there are still laws, and fraud is illegal.
[+] [-] IOT_Apprentice|2 years ago|reply
[+] [-] unknown|2 years ago|reply
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[+] [-] unknown|2 years ago|reply
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[+] [-] playday|2 years ago|reply
Why isn’t the SEC enforcing securities laws against lunch fraud? Lunches must publish their financial statements so lunch buyers can make informed decisions! Personally I am angry that restaurants don’t publish the information I need to make an informed decision regarding my investment. What if they go bankrupt after I paid for my lunch and before they deliver it?
[+] [-] delecti|2 years ago|reply
[+] [-] jkingsman|2 years ago|reply
[+] [-] _jal|2 years ago|reply
[1] https://en.wikipedia.org/wiki/Nomic
[+] [-] bigbillheck|2 years ago|reply
Are you suggesting that retirees, the unemployed, students, and children never buy lunch?
> since you pay for the lunch before you ate it.
When was the last time you went to a restaurant that wasn't fast food?
[+] [-] fulladder|2 years ago|reply
Is this a post-pandemic thing? Like so many people are just walking out without paying the bill these days that they have to charge the card before you eat? This sounds like something that may be happening in SF, and maybe it will catch on in other places eventually, but right now it's not the norm anywhere I've been.
[+] [-] quickthrower2|2 years ago|reply