OpenSea Expecting SEC Lawsuit Over NFTs Being Securities, Says CEO

Prominent NFT marketplace OpenSea is expecting a lawsuit from the United States Securities and Exchange Commission (SEC), co-founder and CEO Devin Finzer said Wednesday, due to what he said is scrutiny over whether NFTs should be considered securities.

“OpenSea has received a Wells Notice from the SEC threatening to sue us because they believe NFTs on our platform are securities,” Finzer tweeted. “We’re shocked the SEC would make such a sweeping move against creators and artists. But we’re ready to stand up and fight.”

The SEC has sent numerous such notices to crypto companies in recent years; they announce that the regulator has concluded an investigation into an entity and plans to bring an enforcement action against it soon. 

But the notice reportedly sent to OpenSea signals a marked escalation of the SEC’s scrutiny of NFTs in particular. While the agency has had some recent success convincing courts that the sale of crypto tokens could plausibly represent securities schemes, NFTs sold on OpenSea constitute a different class of asset that shares more similarity with art and collectibles—sectors the SEC has refrained from ever regulating.

It is still unclear which NFT collections in particular might be labeled as securities should the SEC bring forward a lawsuit against OpenSea. A spokesperson for the regulator told Decrypt that it “does not comment on the existence or nonexistence of a possible investigation,” while OpenSea did not immediately respond to Decrypt’s request for comment regarding the contents and scope of the Wells Notice it says it received. 

But the NFT marketplace hosts tens of thousands of different collections, ranging from on-chain artworks created by independent artists to digital and “phygital” collectibles, along with the types of flashy profile picture (PFP) projects—like CryptoPunks and Bored Ape Yacht Club—that have accumulated massive valuations and attracted speculative interest in years past.

On Wednesday, OpenSea CEO Devin Finzer announced that to “ensure creators can continue innovating without fear,” the company is pledging $5 million to cover legal fees for NFT artists and developers that may soon receive Wells Notices from the SEC. 

Should the agency sue OpenSea, it wouldn’t mark the first time that it has gone after an NFT project. Last September, the team behind Stoner Cats, an NFT-based cartoon series produced by actress Mila Kunis, settled with the regulator for $1 million. 

But the potential suit against OpenSea marks a much broader assault on the ability of centralized marketplaces to facilitate the sale of NFT artworks and collectibles.

At the time that the SEC settled with Stoner Cats, the agency made a point to highlight how, in its view, Stoner Cats had promoted the ability to resell its NFTs as a concrete value-add, as evidence that said digital tokens represented unregistered securities.

Fine artworks and in-demand collectibles, however—from Andy Warhol paintings to rare Pokémon cards—are also universally known to function as stores of value that could constitute good investments in addition to possessing cultural value. For this reason, some believe the SEC will have a much harder time justifying how it can regulate art NFTs and digital collectibles, but not physical artworks and souvenirs. 

“The NFT market is identical to the art market, which existed long before the SEC was created and which the SEC has never regulated,” Brian Frye, a law professor at the University of Kentucky specializing in NFTs and securities law, told Decrypt. “If the SEC thinks the art market is a securities market, it should say so and try to regulate it. If not, it should leave OpenSea alone.”

Last month, Frye—along with Jonathan Mann, a musician who depends on NFTs to fund his work—proactively sued the SEC, in an attempt to force the agency to define what types of NFTs it believes constitute securities, and which don’t. The two feared that if they did not force the issue, all manner of NFTs—even works of pure art that happen to be on-chain—might soon be blanket-banned in the United States with little logic underpinning the move. 

Today’s news appears to have validated those fears. 

“This is exactly why we filed our lawsuit against the SEC,” Frye said on Wednesday.

Editor’s note: This story was updated after publication with additional details.

Edited by Andrew Hayward

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Source: https://decrypt.co/246788/opensea-facing-sec-lawsuit-nfts-securities