SEC probes OpenSea, but NFT artists are likely not the target

Coinbase, Uniswap, Robinhood, Kraken, and Consensys are the names the digital asset industry has grown used to watching receive the dreaded Wells Notices from the United States Securities and Exchange Commission. These companies are exchanges offering 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 for some of the offerings on these platforms to fall under the category of security.

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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 as if they are under attack. But it is likely the true artists don’t need to worry. An NFT project for the sake of art is likely not the type of project the SEC has on its radar.

Most NFTs are not securities

The move by the SEC came as a major surprise, as most NFTs are clearly not securities—they’re just art people buy and sell. And there is a long history of people—indeed, investors—buying art that the SEC does not regulate as a security. And so, the precedent for going after OpenSea is thin.

Heretofore, NFTs have generally been viewed as a consumer product, not a financial product, stripping the SEC of any regulatory authority. Sure, there are some exceptions—such as fractionalized ownership in ventures—though OpenSea did try and 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, any and all of the facts speak against categorizing art in any shape or form as a security. It doesn’t make sense. Everyone knows individuals 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 of the projects on OpenSea go, the SEC won’t have a leg upon which to stand when it comes to any potential legislation.

Instead, the SEC’s focus will be on NFTs promoted as investments and also offer some future profits 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 vs. NFTs similar to token precedents

In past SEC cases against the NFT industry, the SEC has established a clear pattern. How the NFTs had been promoted was at the heart of the case, as well as the promise of future profits thanks to the work of the NFT collection’s team.

Just like during the ICO days, when many projects made bold promises without working on tech, many non-NFT projects functioned as vaporware or vehicles by which founders attempted to raise investments. Instead of innovation, many projects were based on hype and hype alone, especially around the potential resale value of the project, which the SEC sees as a red flag.

NFT projects with royalty schemes, revenue distribution, and similar are the ones the SEC is likely after. For that reason, most NFT artists can breathe a sigh of relief, leave the fight to OpenSea lawyers, and get back to creating.

Those who are attempting more complicated NFT structures must now play a waiting game. Indeed, if there is to be a benefit of the SEC’s Wells Notice to OpenSea, it will long at least be for the possibility of regulatory clarity in the realm of NFTs.

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