SEC Goes After OpenSea – Here are some NFTs that could be at issue – Decrypt

NFT marketplace OpenSea last week Panic bells rang around the world as reports emerged that a lawsuit from the U.S. Securities and Exchange Commission (SEC) was expected. CryptosphereThe US government has opened a major new front in its war against cryptocurrencies, finally taking aim at the heart of the NFT market.

But what does this development actually mean? Will all major NFT projects become, as some say, illegal and unregistered securities? fearOr are only projects specifically aimed at making money at risk of becoming the subject of legal scrutiny?

It may be some time before the SEC takes a clear stance, Legal experts Decryption Past NFT-related enforcement actions by the SEC and statements from its senior officials suggest that a large swath of NFT projects that have made certain marketing decisions may be embroiled in future litigation, but this is unlikely to happen initially, and unlikely to happen all at once.

“They always go after what they think is the easiest thing to achieve first,” said Jeremy S. Goldman, a litigation lawyer who specializes in NFT regulation. Decryption“They only take the 50 projects with the most egregious fact patterns.”

For Goldman, “terrible” means two things in particular: projects that hinted at some kind of investment return when they first marketed NFTs, or projects that promised utility in the form of teams of people working to increase the value of a collectible brand or IP. “These are the hallmarks of an investment,” Goldman said.

In other words, the SEC will likely follow the same tactics it used when going after crypto startups. ICOStartups that sell NFTs to raise funds to develop products could be targeted by the SEC.

Edward Lee, a law professor at the Illinois Institute of Technology who specializes in NFTs, agreed that given that this is the SEC’s first regulatory effort, it’s likely to be inclined to stick to statements made during the collection’s rollout. NFT-related Enforcement Actions last year.

“Maybe that’s the line they’re trying to draw,” Lee said. Decryption“‘Well, if the founders say something that creates an expectation of profit, that’s good enough.'”

Lee, meanwhile, believes such legal arguments are “ultimately untenable,” regardless of whether the SEC will pursue them. He gives the example of other asset classes, such as real estate: A housing developer might tell you that the home you’re buying is in a great neighborhood and will appreciate in value over time, but that doesn’t transform the home from a commodity into a security.

Of course, a home is not generally considered a “joint venture.”It’s one of four tests in the Howey test, a legal framework used to determine whether an asset or transaction qualifies as a type of security known as an “investment contract,” which would be the case for start-ups, for example.

Another point that Lee disagrees with but thinks the SEC could eventually pursue is that any project that guarantees royalties to creators could be considered a securities issuance.

When they pursued enforcement action against an NFT-backed web series produced by Mila Kunis Stoner Cats Last fall, the SEC suggested that creator royalties were a factor in its analysis. In its order against the project, the SEC said that StonerCats’ 2.5% fee on each secondary sale of NFTs demonstrates the team’s commitment to ensuring the long-term value of the project. After all, the more valuable each NFT is and the more sales there are, the more revenue the StonerCats team will earn from collecting royalties.

If creator royalties are included in the criteria the SEC relies on to classify NFT projects as securities, this could pose a huge problem for the industry. famous digital artworks Flashy Profile Picture (PFP) Collections, collecting those fees Industry Standard.

But Goldman doubts the SEC will devote the time and resources to going after iconic NFT collections. CryptopunksDespite cryptopunk being a well-known investment that can now trade at eye-wateringly high prices, Millions of dollars Counsel for the lawsuit said it would likely be too difficult for the SEC to prove that the collection was originally designed and marketed for investment purposes. The CryptoPunks were originally issued for free, and the studio behind the collection only kept 1,000 of the total 10,000 NFTs for itself.

“For them, it wasn’t just an origin story,” Goldman said. “It was more of a natural, viral story.”

CryptoPunks’ IP is currently owned by Yuga Labs, creators of the popular Bored Ape Yacht Club. Yuga itself was reportedly under investigation by the SEC in 2022 for selling NFTs and distributing its ApeCoin token on Ethereum, though no investigation has ever been confirmed or announced by the SEC.

If the SEC does indeed sue OpenSea, it may be months before the public knows which specific companies are suing. The NFT collectibles being sold on the site constitute illegally traded securities in the Commission’s view.

But former SEC prosecutor Arthur Jacoby said OpenSea may already have informal knowledge of the NFT collections the SEC is after.

While notices like the one Wells received can be vague, Jacoby said, “They’re not just a formality. DecryptionIt is common practice for the SEC lawyer handling a case to call in the defense lawyer to detail the alleged facts of the case, including which assets specifically qualify as securities.

“Wells’ notice likely does not clarify which NFTs the SEC will consider to be securities,” Jacoby said. “But [OpenSea] We know exactly which NFTs the SEC claims are securities.”

OpenSea was unresponsive DecryptionRequest for comment on this matter.

Edited by: Andrew Hayward, Guillermo Jimenez