The theory is this. Our sleeping brain is not in the business of creating faces. Every face we see in our dreams is actually someone we've seen in real life. The faces might be taken from familiar surroundings, or just someone we've encountered on the street. Our conscious mind does not even have to remember the person. Since we've seen untold thousands of faces in the course of our lives, the brain has an unlimited supply of characters to draw from in order to populate our dreams.
So every face you've seen in your dreams is a real person you may or may not remember.
Obviously, there's no way to prove or disprove this.
But for a moment, assume that it is true. You know all those nightmare creatures with grotesque mockeries for faces I've dreamt about over the years?
I've seen those around too. I just don't remember them.