The Regulatory Issues of Frac-NFTs and Why the WCY Token May Be Different — Type I NFT Minting

WeCoOwn’s latest WCY token is designed to help its platform users mint their own branded NFT tokens on demand as an alternative to the their conventional offline co-ownership via existing legal structures such as an LLC in the US to own a boat or a plane.

In terms of regulatory security laws there could be a very interesting difference made possible by how, when and why the co-owners get together to buy a certain property or asset such as a boat or a vacation home. Let’s say if four persons meet on the WeCoOwn platform and decide to buy a yacht or a vacation home together and, as an alternative, they choose to obtain WCY tokens in order to get them the permission, like a ticket, to pay for the cost to convert the ERC-1155 standard WCY tokens at the WeCoOwn Mintshop (http://wecoownnft.com) to convert and mint either their own branded NFTs to represent their digital form of a single ownership or co-ownerships. The WCY tokens they obtained could be converted into one non-fungible ERC-721 standard NFT token for representing one single whole ownership or many fungible ERC-20 “Frac-NFT” tokens to represent co-owning the yacht or vacation home together with other co-buyers. This could be done either instead of, or in addition to, forming a traditional LLC to own this particular yacht or vacation home.

This process might create a brand new understanding of how co-buyers might be able to get together on their own to buy properties or assets together which would be clearly very different from the conventional understanding of what is commonly known as a “crowdfunding effort” to sell tokenized digital ownerships.

Let’s call this type of NFT token minting described above “Type I NFT Minting” or “a pre-NFT buyers-ready token minting”.

The interesting issue is that how should these Frac-NFT tokens be treated under security regulations? Based on the Howey test, it does not really sound like a security to me, primarily due to the fact of the timing of when and how these co-buyers or co-investors met. Only for the subsequent secondary market buying and selling of these tokenized digital co-ownerships, the understanding may become a bit iffy.

It is worth to note that even in the current conventional secondary markets practice of using LLCs, people buy and sell partial LLC member interests in yachts and vacation homes privately all day long without having to treat them as securities due to some state exemptions.

Under a different scenario, if a promoter first minted the Frac-NFTs of a particular property or an asset, whether he or she owns it or not, and then tried to sell or to find other investors to buy into their these Frac-NFTs to let the new investors co-own a part of a yacht or a vacation home, then it may most likely have to be treated as securities and require relevant security regulator’s approval for their marketing activities to investors. This behavior is quite similar to the traditional crowdfunding type of fractional shares property ownership. Let’s call this type of Frac-NFTs minting “Type II NFT Minting” or rather a “Post NFT investors-seeking token minting” to distinguish it from the Type I NFT Minting method above.

 

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