NFT: OpenSea receives a Wells notice from the SEC

Yesterday OpenSea revealed that it had received a Wells notice from the SEC for the sale of NFT. 

With this note, the SEC warns the company that it is considering filing a lawsuit against them.

The problem

Even though the SEC has not explicitly stated what the problem is, the issue seems to be related to possible accusations directed at the marketplace for offering unregistered securities to the public.

Given that the OpenSea marketplace allows the buying and selling of NFT, it is more than logical to think that the issue is precisely related to the alleged nature of some NFT as unregistered security. 

In and of themselves, NFTs cannot be considered securities. However, in the event that they are sold with the promise of making profits, for those who buy them, deriving solely from the activity of the seller, they could indeed fall under this definition.

The US law, like that of many other countries, prohibits offering unregistered security to the public, and it appears that no NFT offering has obtained registration with the SEC. Furthermore, even if it were requested, it seems highly unlikely that the SEC would grant it. 

And so the SEC has decided to investigate the offer of NFT on the marketplace of OpenSea. This is to verify if there might be grounds in some cases for a complaint against them for violation of security laws.

The position of the SEC for the NFT of OpenSea

From the Wells notice sent by the SEC to OpenSea, it is not possible to clearly understand the agency’s position regarding NFTs or their marketplace. 

However, at least it can be deduced that they are investigating the matter. 

However, for about two years the agency has been trying to push the idea that many digital assets should be considered unregistered securities. At this point, it is not surprising that, after cryptocurrencies, it has also started to examine NFTs. 

However, two key points need to be highlighted. 

The first is that until now all the most important cases opened by the SEC against subjects accused of offering the public digital assets considered by the agency as unregistered securities have essentially ended with the defeat of the SEC. 

To tell the truth, in the case against Ripple, it seems that the company has admitted some fault, agreeing to pay a fine of 125 million dollars. However, previously XRP had been declared not to be an investment contract if traded on the secondary market (the exchanges).

It remains a fact that until now none of the main digital assets in the world have been definitively delisted from exchanges for losing a case against the SEC. Precisely because all the cases concluded in this area have seen the agency effectively defeated.

The second key point is that behind the action of the SEC there could actually be political and propagandistic (i.e., electoral) intents, rather than technical ones. 

This year there are presidential elections in the USA, and the democratic government of Joe Biden is trying to attract the votes of cryptocurrency detractors. However, this attitude does not seem to have paid off. So much so that in May, probably from the Biden government itself, a sort of diktat arrived at the SEC to approve spot Ethereum ETFs.

So even in this case, the agency’s policy seems to be a bear.

The OpenSea case

After having effectively failed in the attempt to block or limit the crypto markets, the SEC is now trying with the NFT market. 

It should be remembered that, while the crypto market is in great recovery since 2023, compared to the minimum peaks of the bear-market of the previous year, that of NFTs is still in strong suffering. 

For example, the market capitalization of cryptocurrencies, which fell below 800 billion dollars in 2022, has now risen even above 2,000. 

Instead, the monthly trading volumes of NFTs in 2023 have continued to decline. The lowest point was reached just last month (July 2024).

In light of this strong difference, it really seems that the NFT sector is a much easier enemy for the SEC to attack. While the crypto market has not only awakened but has also become decidedly powerful again.

OpenSea is no longer the main NFT marketplace in the world, although it has been for years. However, it remains a point of reference for many reasons.

At this point, it even seems obvious, in some ways, that the SEC ended up going after them. 

The reaction of OpenSea

The co-founder and CEO of OpenSea, Devin Finzer, wrote that they are shocked that the SEC has made such a radical move against creators and artists. Furthermore, he claims that they are ready to react and fight.

He believes that by targeting NFTs, the SEC would stifle innovation on an even larger scale than it has tried to do so far. This is because hundreds of thousands of artists and creatives online would now be at risk, and many would not have the resources to defend themselves.

Finzer defines NFTs as “creative goods”, thus denying that they can be considered investment contracts. 

Writes: 

“It would be a terrible outcome if creators stopped making digital art due to regulatory threats. Take, for example, the lawsuit filed against the SEC by the musician Songadaymann and the conceptual artist Brian L. Frye, which describes their fear that the sale of their art and music might be considered an offering of unregistered securities”.

Finally, it declares that they are committing 5 million dollars to help cover legal expenses for NFT creators and developers who receive a Wells notice. 

It is not easy to understand where this story might be heading, also because on one hand there are no crypto giants like Coinbase or Binance, but on the other hand there is a public agency that until now has been constantly overruled by the courts in this type of action.