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Coinbase, Uniswap, Robinhood, Kraken and Consensys are the names that the digital asset industry has become accustomed to seeing receive the dreaded Well Notices from the U.S. Securities and Exchange Commission. These companies are exchanges that offer a wide range of tokens on their platforms, many of which are clearly investment vehicles with the promise of future profits thanks to the work of centralized teams. It would make sense that some of the offerings on these platforms would fall into the securities category.
But last week, a new and unexpected name joined the list: OpenSea, the largest online nft marketplace. And now hundreds of thousands of online artists feel targeted. But real artists probably don’t have to worry. An nft project for the sake of art is probably not the kind of project the SEC has on its radar.
Most nfts are not securities
The SEC’s decision came as a big surprise, as most nfts are clearly not securities — they’re just works of art that people buy and sell. And there’s a long history of people (investors, in fact) buying works of art that the SEC doesn’t regulate as securities. So the precedent for attacking OpenSea is slim.
Until now, nfts have generally been considered a consumer product, not a financial product, which has deprived the SEC of any regulatory authority. There are some exceptions, of course (such as fractional ownership in companies), although OpenSea has attempted to keep projects promising returns off the platform.
Despite the facts, the SEC is considering a case against the nft marketplace.
The facts are on the side of OpenSea and nft artists
The facts of any case against OpenSea are that the platform generally allows users to buy and sell art, not securities.
There would be no precedent for the SEC to go after nft artists. In fact, every single fact speaks against categorizing art in any form or format as a security. It makes no sense. Everyone knows that people and entities buy and sell art that is not regulated as a security. Online nfts, in most cases, follow this model.
Therefore, as far as most projects on OpenSea are concerned, the SEC will have no foothold when it comes to potential legislation.
Instead, the SEC’s focus will be on nfts that are promoted as investments and also offer some future gains due to the efforts of an nft collection’s founders rather than pure artists just trying to sell their art online in a new and exciting way.
SEC precedent against nfts similar to token precedents
In previous SEC cases against the nft industry, the SEC has established a clear pattern. The way nfts had been promoted was at the heart of the case, as was the promise of future profits thanks to the work of the nft collection team.
Much like during the ICO era, when many projects made bold promises without actually working on the technology, many non-nft projects functioned as vaporware or vehicles through which founders attempted to raise investment. Instead of innovation, many projects relied solely on hype, especially around the project’s potential resale value, which the SEC considers a red flag.
nft projects with royalty schemes, revenue sharing, and the like are the ones the SEC is likely looking for. For that reason, most nft artists can breathe a sigh of relief, leave the fight to OpenSea’s lawyers, and get back to creating.
Those attempting to create more complex nft structures now must wait. Indeed, if the SEC’s Wells Notice to OpenSea has any benefit, it will be at least in the possibility of greater regulatory clarity in the nft space.
