Why SEC’s Hester Peirce advises that selling fractionalized NFTs can violate the law.

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According to SEC Commissioner Hester Peirce, fractionalized NFTs and baskets of non-fungible tokens could easily be called investment contracts under US securities law.

Speaking at Draper Goren Holm’s Security Token Summit on March 25, SEC commissioner Hester Peirce, also known as “Crypto Mum,” alerted issuers of fractionalized non-fungible tokens and NFT index baskets that they might be circulating investment goods inadvertently.

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 cautioned NFT issuers against “selling 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 commanding ever-increasingly high prices, fractionalized interests in these assets enable smaller investors to gain exposure to a limited portion of a high-priced NFT. Cointelegraph published earlier this month on two new teams proposing innovative strategies for fractionalizing non-fungible tokens.

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Peirce also opposed the industry’s use of the Howey Test to decide if crypto assets are shares, saying that it “hasn’t performed that well.”

The Howey Test is commonly used by courts to decide if an asset is a defence, and it is based on a seminal 1946 court case involving real estate contracts issued by the owner of a citrous grove to finance the business’s growth.

According to Peirce, if the test had been used in the 1946 case in the same manner as it is applied to crypto, the courts would have been attempting to decide if the fruit trees were shares or investment contracts related to the plants.

Peirce said that she plans to partner with incoming SEC chairman Gary Gensler to implement her “safe harbour strategy,” which will reduce regulatory oversight of new blockchain networks.

The safe harbour proposal will grant new token issuers three years to create a stable and decentralised network and show that securities laws do not apply. The strategy also calls for issuers to include comprehensive planning for the network’s roadmap, token purchases, and the individuals and investors behind the project.

“You have three years to develop the network so that the token is actually usable or the network is decentralized — and at that point, it’s clear the securities laws don’t apply. And everything that you say will be covered by the anti-fraud laws under the securities laws.”

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