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Coinbase, Uniswap, Robinhood, Kraken, and Consensys are the names the digital asset industry is used to seeing take a terrifying hit. Wales Notices From the US Securities and Exchange Commission. These companies are exchanges that offer a wide range of tokens on their platforms, many of which are clear investment vehicles with the promise of future profits thanks to the work of centralized teams. It would make sense for some of the offerings on these platforms to fall under the category of securities.
But last week, a new and unexpected name joined the list: OpenSea, the largest online marketplace for NFTs. Now hundreds of thousands of online artists feel like they’re under attack. But real artists likely don’t have to worry. An NFT-for-art project is unlikely to be the kind of project the SEC has on its radar.
Most NFTs are not securities.
The SEC’s move came as a major surprise, as most NFTs are clearly not securities — they’re just art that people buy and sell. And there’s a long history of people — and even investors — buying art that the SEC doesn’t regulate as securities. So the precedent for going after OpenSea is slim.
Until now, NFTs have generally been viewed as a consumer product, not a financial product, which strips the SEC of any regulatory authority. Of course, there are some exceptions — such as fragmented ownership in projects — though OpenSea has tried to keep projects that promise returns off the platform.
Despite the facts, the SEC is considering filing a lawsuit against the NFT marketplace.
The facts are in favor of OpenSea and NFT artists.
The facts of any case against OpenSea are that the platform generally allows users to buy and sell artwork, not securities.
There would be no precedent for the SEC to go after NFT artists. In fact, all the facts point to art not being classified as a security in any way, shape or form. That makes no sense. Everyone knows that individuals and entities buy and sell art that is not regulated as a security. Online NFTs, in most cases, follow this pattern.
Therefore, for most projects on OpenSea, the SEC will have no argument to back up when it comes to any potential legislation.
Instead, the SEC will focus on NFTs that are being promoted as investments, and will show some future profits due to the efforts of NFT group founders rather than pure artists who are just trying to sell their artwork online in a new and exciting way.
SEC Precedent vs. NFTs Similar to Token Precedents
In previous cases brought by the SEC against the NFT industry, the SEC established a clear pattern. The way NFTs were promoted was at the heart of the case, along with the promise of future profits from the work of the NFT collecting team.
Just as during the ICO days, when many projects made bold promises without working on the technology, many non-NFT projects have served as sham programs or vehicles through which founders tried to raise investment. Instead of innovation, many projects have relied solely on hype and hype, especially around the potential resale value of the project, which the SEC sees as a red flag.
NFT projects that involve royalty schemes, revenue distribution, and the like are likely to be the ones the SEC is looking to crack down on. For that reason, most NFT artists can breathe a sigh of relief, leave the battle to OpenSea’s lawyers, and get back to creating.
Those trying to create more complex NFT structures will now have to play the waiting game. In fact, if the SEC’s Wells notice to OpenSea is to be of any use, it will at least be waiting for the possibility of regulatory clarity in the NFT space.