Should NFTs Be Considered A Security?

Published date01 September 2022
Subject MatterCorporate/Commercial Law, Technology, Corporate and Company Law, Contracts and Commercial Law, Securities, Fin Tech
Law FirmLewis Brisbois Bisgaard & Smith LLP
AuthorSarkis Yeretsian

If you had asked the author of this post 10 years ago whether he would believe that people would pay thousands upon thousands of dollars for what is essentially a PDF, he would have said you were speaking utter nonsense. However, here we stand, in an era where you cannot go a day without hearing about the latest NFT (non-fungible token) project or the next surefire "To The Moon" cryptocurrency. And, as is tradition, the more notoriety something gets, the more scrutiny it comes under - by attorneys hoping to revolutionize the legal landscape and by governmental entities like the U.S. Securities and Exchange Commissions (SEC).

Readers may be familiar with the popular NFT set known as the Bored Ape Yacht Club (BAYC), founded by Yuga Labs. BAYC is arguably one of the most popular NFTs available for purchase, with certain individual tokens going for as much as $2.6 million dollars. The BAYC tokens are essentially different variations of a cartoon chimpanzee - sometimes in different colors, with different accessories (and some even shooting lasers out of their eyes). BAYC is so immensely popular, that the brand has even procured the public endorsements of famous celebrities such as Eminem, Madonna, Gwyneth Paltrow, Jimmy Fallon, and Paris Hilton.

As previously mentioned, with great popularity comes great scrutiny. BAYC is currently under threat of suit by a plaintiffs law firm mirroring allegations made by the SEC - namely, that NFTs should be considered securities. This interpretation, however, would expose many other similarly situated NFT content creators to large suits and potentially heavy fines from the SEC.

So, What Makes Something a Security?

The SEC relies on the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act) to determine the definition of a "security." Section 2(a)(1) of the Securities Act defines a security as:

"...any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract. voting-trust certificate, certificate of deposit for a security, ... or, in general, any interest or instrument commonly known as a "security."

Securities of 1933 ' 2(a)(1)

While the Acts do not explicitly state "NFTs," the SEC relies on the use of the term "Investment Contract" to flex its...

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