Fake news: SEC thinks NFTs are securities

When OpenSea blogged about a Wells notice it received from the Securities and Exchange Commission (SEC), thousands of supporters instantly rallied. Withholding the actual letter, OpenSea broadcast a response in which it bemoaned the SEC’s supposed targeting of NFTs.

The statement claimed that “classifying NFTs as securities would not only misinterpret the law, but would also jeopardize artists’ livelihoods.” It also warned of commissioners’ allegedly “harmful consequences for consumers, creators, and entrepreneurs.”

Uproar ensued. Crypto promoters couldn’t agree more fervently with OpenSea’s blog and were more than happy to accept its characterization of the facts. They duly tweeted their views to millions of viewers.

• “I guess Gary Gensler thinks NFTs are securities after all,” wrote Bankless, putting words in the chairman’s mouth.
• “The SEC is now trying to claim that NFTs are securities,” tweeted Tyler Winklevoss, gaining 225,000 views.
• Brazenly, the CEO of OpenSea claimed of the SEC, “they believe NFTs on our platform are securities.”
• “If NFTs are securities, everything collectible is a security. And that’s obviously not the law,” wrote a lawyer who should know better.

As with so many fake news events of the past month, it probably never happened.

Fake news again: NFTs as securities

As the SEC has repeated unambiguously on its website, in public speeches, on social media, and in hundreds of court filings, anyone can sell any asset as an investment contract by seeking to use the money of others on the promise of profits.

US courts have found investment contracts that used orange groves, whiskey, condominiums, gas leases, pay telephones, and various other items.

For decades, countless US judges have repeated this indiscriminate treatment of the asset involved in an investment contract. What matters is not the item but the promises, financial projections, and economic realities of the sale. The offer, not the asset, creates the investment contract.

One week ago, a US district judge repeated this clearly: “ordinary assets — like gold, silver, and sugar — may be sold as investment contracts, depending on the circumstances of those sales.”

In ‘SEC v. W. J. Howey Company,’ the Supreme Court explained how sellers can transform any asset into an investment contract by soliciting an investment of money into a common enterprise seeking to profit from the indispensable managerial or entrepreneurial efforts of others.

With that ruling 78 years ago, the Howey Test was formed. US courts have consistently upheld it for decades.

Selling a non-security via a securities offering

For example, in a Howey lawsuit ‘Hocking v. Dubois,’ someone sold a condominium, which is a home and clearly not a security itself, as a security offering. The judge agreed that the seller created an investment contract by adding various financial assurances to the buyer.

Similar examples abound in the progeny of Howey: the investment contract — not the asset involved in the investment contract — is the security.

This simple, clear rule of law makes tweets this week by OpenSea’s CEO and other NFT influencers exasperating.

The law is easy to understand, yet crypto promoters still gleefully claim in 2024 — ignoring 78 years of court precedent — that the SEC wants to classify entire crypto asset types like NFTs as securities. It has not.