Cointelegraph.comHester PeirceHowey Test

SEC’s ‘Crypto Mom’ warns selling fractionalized NFTs could break the law

Fractionalized NFTs and baskets of non-fungible tokens could easily be considered investment contracts under U.S. securities law, warns SEC Commissioner, Hester Peirce.
Speaking at Draper Goren Holm’s Security Token Summit on March 25, SEC commissioner Hester Peirce, also known as “Crypto Mom” warned the issuers of fractionalized non-fungible tokens and NFT index baskets that they could inadvertently be distributing investment products.While Peirce stated that “the whole concept of an NFT is supposed to be non-fungible” — meaning that “in general, it’s less likely to be a security” — she noted that “people are being very creative in the type of NFTs they are putting out there.”Peirce urged NFT issuers to be cautious if they decide to “sell fractional interests” in NFTs or NFT baskets, stating:“You better be careful that you’re not creating something that’s an investment product — that is a security.”With NFTs fetching increasingly exorbitant prices, fractionalized interests in these assets enable smaller investors to still be able to gain exposure to a small share of a high-priced NFT. Earlier this month, Cointelegraph reported on two emerging teams offering novel solutions for fractionalizing non-fungible tokens.Peirce also criticized the use of the Howey Test to assess whether crypto assets are securities, asserting 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, with the test being derived from a landmark 1946 court case concerning real estate contracts issued by the …
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