Unpacking the SEC's First NFT Enforcement Action

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Good morning and welcome back to first mover. The SEC has issued the first enforcement action targeting NFTS the US. Regulator ordered media company impact Theory to compensate investors who purchased NFTS and pay a fine of $6.1 million. Joining us now is her Wang, former EC special counsel and principal at her Wong dot XYZ. Welcome to the show, her. Hey Jan, great to be back. Good to see you. Great to see you again. Um Now let's before we get into the NFT sue, just got to ask you about gray scale. We've been talking about it. The whole show is the sec loss here a blow to their overall crypto strategy. Do you think, you know one of the big problems for Chair Gusler is that he decided to be the enfor chair in, in the S ECs history. Now, the problem with being the enforces chair is that you don't necessarily mean that you're bringing quality cases and this is now starting to show in these breaks where he has. Um No, he's lost a few cases this gray scale. One is a, is a huge blow to the overall crypto strategy and then it's also showing Fishers of is he actually starting to pick winners and losers? This is a real game of Marco Polo that he's playing with the crypto industry, with the public as well of like instead of issuing regulations instead of issuing guidance on these topics, he's doing it through these ad hoc litigation. That's not high impact, right? We think of high impact as being quality because agencies are of limited resources. So they can only focus so much at a time on any particular case. Instead he has this Marco Polo game of thinking like, oh yeah, you're, you're cold, you're cold. Oh no, no, no, hot, hot, we're gonna sue you now and warm maybe. Oh, we might change our mind. This is very, very confusing. It's not a great strategy overall. I think this is just another data point of how this particular strategy of being the enfor chair is starting to crumble. Is this embarrassment though, heavy enough for it to change their mind? Now, will they appeal? I don't know, look, the, I don't know that they're going. It's, it's an embarrassment per se for him because I think that he's been embarrassed over and over and I think that he is suggesting that he's rather righteous about these issues. Um Some you might also look back at when he was the CFTC chair and the number of cases that he brought, the reality is that a chair of any particular agency doesn't have a lifelong tenure. Right. This is so they, their legacy is being built over the course of those few years that they're there. 234 years at most, litigation takes a lot longer than that. So, what we're going to see is probably him, continue to try to make a name for himself as being the enfor his chair. It'll be whether or not the stakeholders who care about him, meaning the senators who will confirm him for maybe another appointment or the president, whether or not they like that narrative. All right, let's now turn to this s ac enforcement action against impact theory. Uh Just briefly unpack the Se C's argument here. This is the first NFT enforcement action we've seen. What are they saying? What was the rhyme and reason behind going after this particular company? So they're saying that it's an unregistered offering. Uh The SEC is saying, look, they offered securities to the public, they didn't register with the SEC. We ran it through the how we test which in the crypto industry we're all probably way too familiar with at this point and they failed the how we test we are now going to give them, you know, this order that they've agreed to, to disgorge all of their earnings from this transaction and pay a penalty of half a million dollars. Um The problem with this is that one, this was much more of a scam. This is a scam that we've seen in a lot of different areas. What I love about the crypto industry is how sleuthing and self policing it is. So this is one that was already uncovered by one of the crypto Twitter users, Zach X BT, I think uh back in 2021. So part of us may be asking why did it take until 2023 for the SEC to do anything about it? But separately, what can an NFT project take away from this? Look, don't be a scam, but that's true of pretty much every industry, right? And we still see them violating the laws like attorneys are still trading on insider trading information, violating those laws, multinational corporations are still violating the F CPA. So NFT projects aren't going to be scams. I think that they already know that I don't think that the vast majority of them are. And so what can you take away from this? Not much? And that's what the other commissioners who dissented said Hester Purse. Uh Mara, they both were, they dissented in this saying, look, this is a big bad set of facts, marketing wise, they weren't great above board players impact theory. However, there's a whole industry of NFT players and they aren't given any sort of guidance here. We're going to outline a list of questions that the commission would be good to start issuing. Yeah, I, I want to ask you about that actually because our reporting also said, and I'm gonna be reading this out that the S ECs findings do not suggest regulators consider all NFTS to be securities. So I, I, we get what you're saying, my understanding from all of this is that we have to ask this question are all NFTS securities now? And what is the answer to that? The SEC wants the public to think that Nfts they have jurisdiction over determining whether or not NFTS are securities, right? They want uh everyone in the public to think that that your reporting is right? There's no one can say that NFTS are securities and this order doesn't tell us that. But what this order did do in the press release was suggest that all NFTS are securities unless there's some sort of exemption that you go through with the SEC. And that's a big problem. Um because NFTS by their nature aren't going to follow along with how we think about securities. And certainly the, how we test again running through all those questions that the other commissioners at the SEC poses as things that people need to know in order to figure this out. You know, you talk about the language that the SEC used, um especially in their press release. I know you had a tweet talking about uh the press release kind of pointing to the SEC wanting people to think that NFTS are Securities. How do you think some of the bigger brands that are not crypto native who have gotten into NFTS? Like the Starbucks, like the Burberry of the world are going to look at this and react. Yeah, I've got to think one that they've got their army of lawyers looking at this thinking like, hey, is this our, our, our All NFT Securities? This is, we just saw this press release from the SEC and they're gonna run through their analysis. But the the crappy thing, the reality is that an army of lawyers shouldn't have to write a memo about this, right? This is a obviously not true that they're all securities. And yeah, and again, the SEC made a choice in the way that it framed things. It made a choice because it could have just said, hey, we, we went after a company impact theory for the unregistered offering of securities that would be in line with the way that they do their other press releases because they're not saying like, hey, someone violated insider trading with all the biopharmaceutical information or someone violated uh auditing requirements with music streaming and then suddenly wrapping in all of that underlying industry. So just want to understand from your perspective whether a judgment uh by a commission like this one where there are two out of five commissioners dissenting uh lends it lesser credibility in an already well, completely confused environment of what is a security what is not a security and then weakens the case going forward to, for example, the next case where this question comes up court case. That is like, so two questions, one because of two commissioners dissenting, has this lost credibility? And two in your understanding, has there ever been this kind of level of dissenting happening at, you know, in a particular space? So dissents are not un so let me like take them um in reverse order, right? Dissents are not uncommon, especially when you have a commission voting on things. The commission structure is not a typical structure at an agency. Uh It makes an agency a little slow moving but also much more deliberative. And so this is not uncommon because they're going to be also appointed according to political lines. So the more political an issue is the more you going to see these kinds of 32 votes having said that though, um going back to your first question of does this undermine the credibility? I think that what we are going to see later on is that other court cases are going to say, look, this kind of notice is con like the sec generally by giving notice to the industry and the crypto industry in particular is confusing. They have not been, you know, this is not black and white law, this is not something that everyone understands. And the way that we know that is that their own commissioners don't understand what the agency there is doing their own. Commissioners disagree that this is the right rationale we should be taking or this is the right perspective we should be taking. So those words, these dissents that uh commissioner and commissioner are putting out will likely see themselves being quoted in court cases and briefings and pleadings later on. All right, Hermine, thank you so much for joining us this morning. It was a pleasure seeing you again. Thanks so much for having me. Great to see you both. That was Hermine Wang, former sec special counsel and principal at Herm Wong dot XYZ.