Yesterday Devin Finzer, the CEO of NFT marketplace OpenSea, revealed he received a Wells Notice of impending legal action by the SEC, because the regulator believes NFTs on the platform are securities.
While perhaps a small subset of NFTs could be securities, the SEC’s goal is broader.
The Stoner Cats case
Almost a year ago it settled with the creators of the Stoner Cats NFT series regarding an ‘unregistered offering of crypto asset securities’.
SEC Commissioners Hester Peirce and Mark Uyeda dissented to the Stoner Cats case, noting the broad implications for various types of creators.
They wrote that an artist “deserves clear guidance about whether and how the securities laws apply. Artists of all kinds have long struggled to support themselves, and NFTs offer a potentially viable way for them to monetize their talents. The fact that money is involved does not transform NFTs into securities.”
“This enforcement action involves activity that we believe constitutes fan crowdfunding—a common phenomenon in the world of artists, creators, and entertainers.”
In a review of the Stoner Cats case, law firm DLA Piper stated there was “little to distinguish Stoner Cats from myriad other NFT projects.”
Based on that, we can infer that the SEC’s potential action against OpenSea is not connected to a small subset of NFTs, but rather to the majority of them.
In order to get legal clarity, in late July two artists commenced legal action against the SEC, including song-a-day creator Jonathan Mann who has made some irreverent ones involving SEC Chair Gary Gensler.
The lawsuit opens with compelling questions: “Should artists be forced to make public disclosures about the ‘risks’ of buying their art? Should artists be required to comply with the federal securities laws, and the thousands of regulations and reams of interpretive guidance thereunder, just to offer their works to the public? Or can artists simply create, and sell, art?”
A swift backlash
Brian Frye is the other plaintiff artist in the lawsuit, and he also happens to be a law professor. In an opinion piece on Coindesk in response to the OpenSea Wells Notice, he wrote that NFTs “expose the incoherence of the SEC’s understanding of what it’s authorized to regulate.”
“The SEC is wrong. No, it’s worse. The SEC is nuts. The NFT market is identical to the art market. Or rather, the NFT market is an art market. If the SEC can regulate the NFT market, then it can also regulate the art market.”
He continued, “if it made sense for the SEC to regulate the art market, it would have done so a long time ago.”
While one might expect the crypto sector to object to the lawsuit, there’s a sense of disbelief. And that incredulity extends to some lawmakers.
Democrat congressman Wiley Nickel wrote on X, “The aggressive use of ‘regulation by enforcement’ from the SEC is a blatant abuse of power that erodes trust and transparency in our regulatory system. This heavy-handed approach creates widespread uncertainty and threatens to derail the progress driving digital innovation in the United States.” He urged the SEC to work with Congress to draft clear and fair regulations.
On X several people asked whether the SEC planned to go after eBay because it sells collectibles.
Does the SEC have a point?
We like to provide a balanced view on Ledger Insights, but this one is a little trickier. Some NFTs are closer to being securities, but in our view they’re the minority. It’s widely known that selling fractions of NFTs can be a security. We’ve also seen some NFTs used as a way of signing up people to what are essentially investments clubs, nothing to do with creating art.
Certainly many people outside of the crypto world believe that most NFTs are questionable. That’s fair enough, so they don’t buy them.
There are plenty of established names, including all the major sports franchises, music labels and brands that have sold NFTs, such as Adidas, Nike, etc. How come the SEC doesn’t target them? The brands would view their initiatives as marketing and engaging a new audience. Isn’t it the same for artists?
