2024

The United States Securities and Exchange Commission issued a Wells notice to OpenSea on Aug. 28, stating that the non-fungible token (NFT) exchange had served as a marketplace for unregistered securities.
OpenSea CEO Devin Finzer<a data-ct-non-breakable="null" href="https://x.com/dfinzer/status/1828791832009953706" rel="noopener noreferrer nofollow" target="null" text="null"> said</a> he was “shocked” by the SEC action.
The crypto community protested the notice, which <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/opensea-wells-notice-sec-nfts" rel="noopener noreferrer nofollow" target="null" text="null">serves as a warning that the SEC</a> may take enforcement action against the exchange.&nbsp;
Finzer said that OpenSea is prepared to “stand up and fight,” signaling a potential intention to take the case to court rather than seeking a settlement.
Finzer criticized the SEC for pursuing “regulation by enforcement” because it has sued several major crypto companies for operating as unregistered securities platforms.&nbsp;
However, Finzer said that targeting NFTs is “uncharted territory” for the SEC and believes that “hundreds of thousands of online artists and creatives are at risk.”
<h2 id="nft-collections-and-marketplaces-under-scrutiny-not-artists">NFT collections and marketplaces under scrutiny —&nbsp;not artists&nbsp;</h2>
But are artists and creatives the SEC’s real target?
Grant Gulovsen, a US lawyer who works with the tech and crypto sectors, told Cointelegraph that he suspects the main complaint “will be targeted to a limited set of NFT collections that were actively promoted by the issuers as good investments and that those promotional statements were repeated by OpenSea.”
He believes the SEC will “unlikely involve people who were just releasing art.”&nbsp;
The SEC has already brought NFT-related cases <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/sec-charges-podcaster-first-unregistered-securities-sales-claim-against-nft-offering" rel="noopener noreferrer nofollow" target="null" text="null">against entertainment firm Impact Theory</a> and the<a data-ct-non-breakable="null" href="https://cointelegraph.com/news/sec-charges-company-behind-stoner-cats-nft-series-unregistered-securities-sale" rel="noopener noreferrer nofollow" target="null" text="null"> animated series </a><a data-ct-non-breakable="null" href="https://cointelegraph.com/news/sec-charges-company-behind-stoner-cats-nft-series-unregistered-securities-sale" rel="noopener noreferrer nofollow" target="null" text="null">Stoner Cats</a>. Gulovsen explained that in both cases, it was critical to how the NFTs were promoted and marketed to potential purchasers as a good investment opportunity or a project where the team was essential to the future value of the NFTs.
Andres Munoz, a litigation partner and attorney from Romano Law, told Cointelegraph that if any NFT marketing suggests that buyers will profit from the NFT’s future value due to the efforts of the artist, marketplace or other parties, it might meet the criteria of the Howey test — the determining factor of whether something is a security under US law.
Similarly, Gulovsen said that if project founders assure buyers that these NFTs are a profitable investment and encourage reliance on their expertise for the collection’s success, they create an investment contract. This, in turn, classifies the NFTs as securities.
Recent: <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/ethereum-layer2-defi-blockchain-adoption" rel="noopener noreferrer nofollow" target="_self" text="null">Solutions without problems: How many Ethereum layer 2s are too many?</a>
Munoz said that after the value of NFT projects like <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/nfts-millions-investment-ethereum-tokens" rel="noopener noreferrer nofollow" target="null" text="null">CryptoPunks and Bored Ape Yacht Club skyrocketed</a>, “there were plenty of NFT creators who leveraged that popularity to launch an NFT project as a get-rich-quick scheme.”
He believes that some NFTs are financial products at their core, citing generative NFT collections<a data-ct-non-breakable="null" href="https://x.com/0xDr_DeFi/status/1828803130290790519" rel="noopener noreferrer nofollow" target="null" text="null"> sold</a> to consumers to raise capital for the NFT founder or project as an example.&nbsp;
He noted that these projects “glossed over the actual creative or artistic aspects of the NFT and instead focused on generating hype” and implied resale value on secondary markets.&nbsp;
As for NFT marketplaces such as OpenSea, Gulovsen remarked that if an NFT collection posted financial promotions on their portal, they could be implicated despite acting as a secondary market.&nbsp;
He mentioned that this occurred in the case of the SEC vs. Kraken, where the crypto exchange<a data-ct-non-breakable="null" href="https://www.bloomberg.com/news/articles/2024-08-23/kraken-must-face-sec-lawsuit-over-crypto-exchange-registration" rel="noopener noreferrer nofollow" target="null" text="null"> published</a> statements made by Solana and Algorand that could be used by the SEC to implicate Kraken.
Bob Bodily, CEO of the Bioniq Ordinals NFT marketplace, told Cointelegraph that NFT marketplaces are well aware that “any marketing of an NFT as an investment could be problematic” and, therefore, actively moderate their platforms.&nbsp;
<blockquote>
 “Any mention of passive investment or passive yield projects is generally avoided on NFT marketplaces.”
</blockquote>
Bodily said that NFT collections are delisted from OpenSea and other NFT marketplaces once they promise financial returns.
<h2 id="a-number-of-nft-use-cases-could-be-securities">A number of NFT use cases could be securities</h2>
NFTs can be used for many different use cases, from proof of ownership or <a data-ct-non-breakable="null" href="https://cointelegraph.com/learn/what-is-tokenized-real-estate" rel="noopener noreferrer nofollow" target="null" text="null">real estate tokenization</a> to <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/nft-utility-to-remedy-ticketing-dilemmas-experts-weigh-in" rel="noopener noreferrer nofollow" target="null" text="null">anti-forgery in the ticketing industry</a> or simply to stamp digital artwork, among others.&nbsp;
As Perianne Boring, founder and CEO of The Digital Chamber, <a data-ct-non-breakable="null" href="https://x.com/PerianneDC/status/1828806438153605133" rel="noopener noreferrer nofollow" target="null" text="null">pointed out</a> on X, some NFT usage is more prone to being considered a security.&nbsp;
<blockquote class="twitter-tweet">
 Most NFTs are not securities, though specific cases like fractionalized art may be exceptions. The <a href="https://twitter.com/DigitalChamber?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">@DigitalChamber</a> successfully advocated for NFTs to be excluded from market structure legislation, maintaining their status as consumer, not financial, products. The SEC does not… <a href="https://t.co/CQNzjE8OLI" rel="noopener noreferrer nofollow">https://t.co/CQNzjE8OLI</a>— Perianne (@PerianneDC) <a href="https://twitter.com/PerianneDC/status/1828806438153605133?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">August 28, 2024</a>
</blockquote>
Munoz said that NFT royalty schemes, which include promises of payouts and other revenue to tokenholders, reflect the financial or investment aspect of these NFTs. This could put them on the SEC’s radar.
Munoz also noted, “Projects where the value of NFTs is promoted as dependent on the success of a broader venture as a gaming platform or metaverse.”
US regulations regarding NFTs have been vague. Bioniq’s Bodily believes the SEC doesn’t offer clear guidelines because “they want the widest possible angle so they can sue whoever they want.”
In Bodily’s opinion, the SEC isn’t following any secret plan against crypto, as they bluntly demonstrate they are against crypto. He said that people who back the SEC don’t want decentralized financial services to exist.
Bodily believes the collateral effects of the SEC’s policy are evident: uncertainty and fear for regular NFT artists.
<h2 id="crypto-industry-seeks-clear-regulations">Crypto industry seeks clear regulations</h2>
The crypto industry wants clear regulations.&nbsp;
US crypto exchange Coinbase has frequently tried to force the SEC to publish clear guidelines.&nbsp;
Concerning NFTs, on July 31, two artists took legal action to demand clarification from the SEC over the status of NFTs. The crypto industry is not alone; politicians are also trying to push for a more straightforward set of rules for the crypto sector.
Regarding the Wells notice for OpenSea, Jake Chervinsky, lawyer and chief legal officer of venture firm Variant, said that the SEC has “lost the plot” and suggested it is outdated.
<blockquote class="twitter-tweet">
 The SEC has fully lost the plot. The idea that a financial markets regulator established in the 1930s would have jurisdiction over digital art in the 2020s defies not only common sense but also the SEC's statutory authority. Thanks to <a href="https://twitter.com/opensea?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">@opensea</a> for fighting the good fight 🫡 <a href="https://t.co/7Fxx0Ulv5m" rel="noopener noreferrer nofollow">https://t.co/7Fxx0Ulv5m</a>— Jake Chervinsky (@jchervinsky) <a href="https://twitter.com/jchervinsky/status/1828797291978703139?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">August 28, 2024</a>
</blockquote>
Pro-crypto lawmakers have also criticized the move. Representative Wiley Nickel <a data-ct-non-breakable="null" href="https://x.com/RepWileyNickel/status/1828847275952542033" rel="noopener noreferrer nofollow" target="null" text="null">said</a>, “The SEC and Gary Gensler should abandon this path and work with Congress to establish clear and fair regulations that foster innovation and keep jobs in the U.S.”
Others were more humorous in their critique of the SEC:
<blockquote class="twitter-tweet">
 HOW IN THE FUCK IS THIS A SECURITY ? <a href="https://t.co/53f7U4cFkA" rel="noopener noreferrer nofollow">pic.twitter.com/53f7U4cFkA</a>— bunny 🍌 (@DaBunnyOFFICIAL) <a href="https://twitter.com/DaBunnyOFFICIAL/status/1828895254554071190?ref_src=twsrc%5Etfw" rel="noopener noreferrer nofollow">August 28, 2024</a>
</blockquote>
<h2 id="nft-artists-fear-a-cap-on-creativity">NFT artists fear a cap on creativity</h2>
A collateral effect of the SEC’s action against OpenSea could be “increased and unnecessary regulatory scrutiny of regular NFT artists who are simply trying to sell their art,” expressed Munoz.
NFT artist Javier Arrés told Cointelegraph that the OpenSea development is not encouraging and admitted that “artists are asking a lot of questions.”&nbsp;
The artist acknowledged that most digital artists minting their work as NFTs are unaware of these complexities. Arrés noted that it’s a common misconception that NFT artists possess deep knowledge of the stock market, cryptocurrencies or investments. He explained that “the vast majority of us are just artists who put our digital works for sale on platforms that allow us to do so.”
Related: <a data-ct-non-breakable="null" href="https://cointelegraph.com/news/big-tech-privacy-government-data-regulation" rel="noopener noreferrer nofollow" target="null" text="null">How Big Tech handles privacy and governments’ data demands</a>
Arrés criticized certain NFT collections created solely for profit without creative value, blaming them for tarnishing the entire sector. “These projects,” he said, “are the ones that have made everything dirty.”
<blockquote>
 “I would understand the pursuit of these collections but not the individual artist who has done nothing more than put his artworks for sale on a platform.”
</blockquote>
Arrés said that regulators and the public often fail to distinguish between individual artists with unique styles and large-scale studio projects featuring thousands of identical kittens, penguins or monkeys.

Why is the SEC going after digital art and monkey pictures?

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Cointelegraph

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