There has been a lot of buzz in the space about the impending launch of ERC-404 tokens. ERC-404 tokens aim to blend the properties of existing ERC-20 and ERC-721 standards to allow for fractional ownership of NFTs. NFT Now. The question now is whether this new and innovative token protocol could reignite the debate over whether fractionalized NFTs are investment contracts under the SEC's interpretation of the Howey Test. SEC Commissioner Hester Peirce, also known as “Crypto Mom,” has previously warned that “fractionalized NFTs and baskets of non-fungible tokens could easily be considered investment contracts under U.S. securities law.”

Given the SEC's recent application of securities laws to NFTs in the Impact Theory enforcement action, ERC-404 tokens, especially those that emphasize fractionalization and potential profits, may indeed face intense scrutiny. The SEC's pursuit of Impact Theory LLC for conducting an unregistered offering of NFTs, labeled as "Founder's Keys" in three tiers ("Legendary," "Heroic," and "Relentless"), raises significant implications for the classification of fractionalized NFTs under U.S. securities law. The promotion of these NFTs as investments and their potential for profit based on the company's success led the SEC to classify them as investment contracts, hence securities. This action underscores the SEC's stance that offerings, regardless of their form, must be registered unless a valid exemption applies, to ensure investor protection through disclosures and safeguards.

Regarding ERC-404s, the key consideration will likely involve whether these tokens meet the investment contract criteria under the Howey Test, which assesses the investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.

Given the SEC’s enforcement action against Impact Theory and the agency's current direction under Gary Gensler’s leadership, it seems highly probable that the SEC could regard ERC-404 tokens as investment contracts, subject to regulation under the Securities Act of 1933.

The excitement around ERC-404 tokens marks a significant moment for the digital asset world, spotlighting the dynamic between innovation and regulation. While these tokens introduce a new form of fractional NFT ownership, they also spark debate over whether the SEC might view these fractionalized NFT smart contract protocols as investment contracts.