OpenSea, the leading non-fungible token (NFT) marketplace, said it has received a Wells Notice from the Securities and Exchange Commission (SEC). The SEC is eyeing NFTs sold on OpenSea as securities and threatens a potential enforcement action against the platform.
In the wake of the action, OpenSea’s CEO committed $5 million to legal defenses amid SEC’s expanding scrutiny of NFTs.
Responding to the SEC’s warning, Devin Finzer, OpenSea’s CEO, said he was shocked and disappointed, but vowed to fight back. He also criticized the SEC’s approach, arguing that it stifles innovation and harms creators.
“We’re shocked the SEC would make such a sweeping move against creators and artists. But we’re ready to stand up and fight,” Finzer stated.
“By targeting NFTs, the SEC would stifle innovation on an even broader scale: hundreds of thousands of online artists and creatives are at risk, and many do not have the resources to defend themselves,” OpenSea shared in a blog post.
More SEC Madness
Finzer also announced a $5 million legal defense fund, aiming to support NFT creators and developers who are similarly targeted by the SEC. He said it would ensure artists have the necessary resources to defend themselves.
The SEC has been actively scrutinizing the cryptocurrency and digital asset space. Since the start of the year, several major firms, including Uniswap, Consensys and Robinhood, have fallen under the agency’s radar.
The allegation of unregistered securities offerings is the common point among all the SEC’s Wells Notices issued to those firms. The SEC has consistently targeted these firms for potentially violating securities laws, claiming that they offer products and services that it classifies as securities without proper registration.
Are NFTs Securities?
Like many digital tokens, the classification of NFTs is unsettled. If we’re taking the Ripple-SEC lawsuit as an example, certain NFTs may indeed be classified as securities in some cases, but certain may not be.
The case of OpenSea could set a precedent for how NFTs are treated under U.S. law, potentially affecting other NFT projects and creators. OpenSea argues that NFTs are fundamentally creative works, not financial instruments.
OpenSea was not the first NFT-focused case. In August 2023, the SEC fined Impact Theory, an entertainment company, $6.1 million for offering and selling NFTs in an unregistered securities offering.
Despite agreeing to pay the penalties, Impact Theory did not admit or deny the SEC’s allegations. The company committed to destroying all remaining Founder’s Keys and eliminating any future royalties from secondary market transactions involving these NFTs as part of a cease-and-desist order.
Yuga Labs, the creator of the popular Bored Ape Yacht Club (BAYC) NFT collection, was targeted by the SEC in 2022. As reported, the Commission particularly examined whether the original BAYC NFT collection and its associated cryptocurrency, ApeCoin, met the criteria for securities under U.S. law.
As of now, Yuga Labs has not been accused of any wrongdoing, and the investigation does not guarantee that charges will be brought against the company. The entity has stated its commitment to working with the SEC’s inquiries.
Earlier this year, two NFT creators, Jonathan Mann and Brian L. Frye, initiated a lawsuit against the SEC seeking clarity on the regulatory status of NFTs. They were concerned about the SEC’s potential legal actions against their planned NFT projects.
The lawsuit targeted comparing NFTs to traditional forms of art, such as music. The creators argued that the SEC overstepped its authority by attempting to regulate art and NFTs as securities, which they claim lacks clear Congressional authorization.
The case is still pending, and its outcome could provide much-needed clarity on the legal status of NFTs. A favorable ruling could also limit the SEC’s authority over similar offerings and encourage innovation within the space.
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